Case R81

Judges:
KP Brady Ch
JE Stewart M

Court:
No. 2 Board of Review

Judgment date: 21 August 1984.

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K.P. Brady (Chairman) and J.E. Stewart (Member)

The question for decision in this case is whether the taxpayer, a specialist medical practitioner, is entitled to a deduction under sec. 51(1) of the Income Tax Assessment Act 1936 in respect of expenses incurred by him during the year of income ended 30 June 1978. The particular expenses of $1,154 in issue include the cost of fares ($72), meals and accommodation ($420) incurred by him whilst living in temporary accommodation with his wife and two young children in the United Kingdom, and the cost of his air fare between London and Australia ($662).

2. For present purposes the essential facts in the case may be stated shortly. The taxpayer graduated from medical school in Australia in 1969. He was then appointed to a training position that enabled him to pursue his studies in the speciality of ear, nose and throat surgery. He successfully completed the course in due course, and achieved status as a specialist in that field early in 1975. He resigned his training position in December 1975 (which would have ceased in any event in February 1976), and left Australia with his family for the United Kingdom in January 1976. The taxpayer's purpose in travelling to the United Kingdom was to gain experience that would improve the depth and breadth of his competence within his speciality which, in turn, would enable him to establish and maintain a practice of some excellence on his return to Australia. At the time of his departure he had not commenced to practise on his own account and he had not sought to be, nor did he anticipate he would be, re-employed with the same employer, or employed by another employer, on a similar, or on an improved, basis on his return to Australia.

3. Whilst in the United Kingdom, the taxpayer was employed by a number of hospitals where he gained the further experience and expertise that he sought without, it might be relevant to note, adding to the professional qualifications which he had obtained in Australia. The income derived by him from those sources was subject to United Kingdom tax.

4. The major part of the fares of $72 in issue, that were paid in the months of July, August and September 1977, related to the cost of train travel between the taxpayer's home in the United Kingdom and a provincial city hospital where he worked for some time. A small part of the fares related to train travel between that city and London and the use of taxis that became

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necessary when the taxpayer attended meetings of his professional association in London. The nature of the other expenses in issue (also incurred during the abovementioned months), concerned with meals and accommodation and the air fare, are self-evident and need no further explanation.

5. Shortly after his return to Australia in September 1977, the taxpayer commenced to practise on his own account and also took up a part-time appointment with a children's hospital as a visiting specialist on a sessional basis. It appears that that appointment had been arranged some six months before returning home from overseas. In his 1978 return of income, the taxpayer sought to deduct the expenses in issue from the income derived from those sources in the period September 1977 to 30 June 1978 inclusive.

6. On the facts as found, there can be little doubt, in our opinion, that the expenses associated with travel, meals and accommodation in the United Kingdom could not, in the light of the authorities, be regarded under the first limb of sec. 51(1) of the Assessment Act as losses or outgoings incurred in gaining or producing the taxpayer's salary income that ceased to be derived by him on the termination of his employment prior to undertaking the trip to the United Kingdom (see
Amalgamated Zinc (de Bavay's) Ltd. v. F.C. of T. (1935) 54 C.L.R. 295;
Ronpibon Tin N.L. and Tongkah Compound N.L. v. F.C. of T. (1948-1949) 78 C.L.R. 47). Also, having regard to those authorities, we do not consider that there could be any support for the proposition that the cost of the taxpayer's air fare between London and Australia, which was incurred shortly before he departed for Australia, could be related in any relevant way, for the purposes of the first limb of sec. 51(1), to the income derived by him before leaving Australia.

7. In our opinion the taxpayer's claims, when considered under the first limb of sec. 51(1), do not gain any support from the decision of the Supreme Court of New South Wales in
F.C. of T. v. Kropp 76 ATC 4406 where, unlike the circumstances in the instant case, the expenditure was (to quote the headnote):

``part of a plan pursued by the taxpayer to increase his income from his employment as an accountant by the acquisition of two years' overseas experience with a national firm associated with his Australian employer, at the conclusion of which it could have been anticipated with considerable confidence that he would be re-employed in Australia at an increased salary and that the rate of increase of his salary in his remaining professional life would be accelerated.''

Unlike Mr. Kropp, the taxpayer in the present case could not on the evidence be regarded as having been in continuous employment with the same employer for any part of the time that he was overseas. In the circumstances, the considerations that provided the necessary ``perceived connection'' (see
F.C. of T. v. Hatchett 71 ATC 4184) between the outgoing and the assessable income of Mr. Kropp were absent in the instant case with the consequence that it could not be fairly said, first, that the outgoings now under consideration were ``incurred in gaining the assessable income'' of future years in Australia and, secondly, that they were therefore deductible.

8. Similarly, those expenses could not, in our opinion, be regarded as falling for deduction under the second limb of sec. 51(1) in relation to his 1978 income obtained from the conduct of his practice and on a sessional basis that only began to be derived following upon the commencement of those income producing activities subsequent to his return to Australia. The evidence indicates that the taxpayer did not in fact carry on business before that time and the taxpayer appeared to accept that that was the true position. In the circumstances, we need not dwell upon the question of whether a business was carried on before that time although there can be little doubt, in the light of the principles established by the authorities (see in particular
John Fairfax and Sons Pty. Ltd. v. F.C. of T. (1958-1959) 101 C.L.R. 30;
A.G.C. (Advances) Ltd. v. F.C. of T. 75 ATC 4057;
Ferguson v. F.C. of T. 79 ATC 4261;
Inglis v. F.C. of T. 80 ATC 4001), that a business was not carried on by the taxpayer before his return to Australia.

9. However, we find it desirable to mention specifically that, in our opinion, the circumstances of the present case are clearly distinguishable from those in
F.C. of T. v. Highfield 82 ATC 4463, that led the Supreme Court of New South Wales to find in favour of the taxpayer in that case. Unlike the taxpayer in the present case, Dr. Highfield, a dentist,

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carried on a general practice in Australia before proceeding to the United Kingdom to undertake further study as a periodontist so that he could expand that part of his work in his general practice (that continued to be carried on during his absence) on his return here. On the facts in Highfield, the Court found that there was a high probability that the additional skill in periodontics acquired by Dr. Highfield would enable him to charge higher fees on his return here and therefore to derive greater income from the conduct of his general practice. There was therefore, the Court found, the necessary connection between the expenditure there in issue, comprising air fares, university fees, meals and accommodation, and the gaining of Dr. Highfield's assessable income to justify a deduction. Whilst it seems possible that the amount of the present taxpayer's assessable income derived after commencement of his practice on his return here might have been greater than it might otherwise have been without his United Kingdom experience, it nevertheless remains a fact that the expenses in issue were incurred before the commencement of the business, or were incurred ``at a point too soon'' (see
F.C. of T. v. Maddalena 71 ATC 4161), with the consequence that they could not have been, in the light of the authorities referred to, ``necessarily incurred in carrying on a business for the purpose of gaining or producing'' the taxpayer's assessable income (second limb of sec. 51(1)) and therefore deductible.

10. The expenses in issue in so far as they concern train fares, meals and accommodation in the United Kingdom appear to relate more directly to the derivation of United Kingdom income or ``to the gaining or production of exempt income'' (see proviso to sec. 51(1)) than to the derivation of assessable income for Australian tax purposes. In the circumstances, it would seem that the nexus between the outgoings and assessable income would therefore be too remote to qualify them as deductions under sec. 51(1) or that, in any event, they were outgoings incurred in relation to the production of exempt income and therefore precluded as deductions under the proviso to that subsection.

11. If, however, we are wrong in the conclusions which we have reached, we are of the opinion that all of the expenses in issue (including taxi fares in the United Kingdom and the air fare between London and Australia) were essentially of a private nature and therefore not deductible (see
Lunney v. F.C. of T.; Hayley v. F.C. of T. (1957-1958) 100 C.L.R. 478;
F.C. of T. v. Forsyth 81 ATC 4157;
Handley v. F.C. of T. 81 ATC 4165).

12. Finally, as a general comment, we would add that we have reservations as to whether the taxpayer's claims were soundly based as to quantum in that they did not take into account the income (amount not known) which, we understand, was derived by the taxpayer in the United Kingdom in the months of July, August and September 1977, when the expenses in issue were incurred. If, contrary to our conclusions, the expenses incurred in that period were properly deductible, it seems to us, as a matter of principle, that there are sound reasons for concluding that the amount to be deducted from assessable income would be a net amount, i.e. total expenses in period less income, that would in a real sense represent the relevant costs for tax purposes incurred in the period.

13. For the above reasons, we would uphold the Commissioner's decision on the objection and confirm the assessment in issue.

Claim disallowed