Case V1

Members:
KL Beddoe SM

Tribunal:
Administrative Appeals Tribunal

Decision date: 11 December 1987.

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K.L. Beddoe (Senior Member)

The question to be decided by the Tribunal is whether certain overseas travel expenses incurred by the applicant (a music teacher) are allowable deductions within the terms of subsec. 51(1) of the Income Tax Assessment Act. The expenses were incurred in connection with the applicant's music studies in Europe. The applicant travelled to Europe at her own expense and was unaccompanied.

2. In her return of income for the year ended 30 June 1980 the applicant described herself as a ``tutor in music'' and disclosed income derived by way of salary from a College of Advanced Education for the period 1 July 1979 to 21 December 1979. The gross salary disclosed was $6,239.

3. A schedule attached to the return of income disclosed that the applicant had received a scholarship to study in Europe (for four months) a method of teaching music (Kodaly). This method is world renowned.

4. The scholarship awarded to the applicant provided for her study and living expenses while undertaking the course of study but did not cover her costs of travelling to Europe.

5. In addition to the four months of study under the scholarship the applicant also spent approximately two months (May and June 1980) at a music academy in Finland. While in Finland she was required to pay her own living expenses and the cost of travelling to Finland.

6. The claims in dispute are:

      Board accommodation and fares
        in connection with the study
        at the Finnish Music Academy         $750
      Air fares to Europe                  $2,435
      

7. Advice of the award of the scholarship came to the applicant from the Australian Department of Education by letter dated 14 August 1979. Apparently the Education Department had been advised of the award by the Government of Hungary. The applicant had applied for the scholarship early in 1979.

8. The applicant holds two university degrees majoring in subjects directly related to music education. From 1975 to 1978 the applicant was a music teacher in schools and also in 1977 she became a part-time tutor in music education at a College of Advanced Education. In mid-1978 the tutor's position became a full-time appointment on an academic year by academic year basis. The applicant also engaged in a number of other activities connected with music education but I need not explore these. The picture which emerged is one of a dedicated music teacher possessing considerable skills in her field but concerned to improve those skills at every opportunity. Hence the trip to Europe and the claim for the expenses incurred.

9. In July 1979 the applicant learnt that her husband had been offered an appointment by a tertiary institution in another State. The applicant wished to move interstate with her husband but experienced some concern as to whether her qualifications were sufficient for her to obtain a position as a music teacher in the new location.

10. However, that was not the motive for applying for the scholarship and undertaking the course. The applicant gave evidence that she would have continued with the scholarship and undertaken the courses irrespective of the possibility of her husband moving interstate thereby necessitating, in her view, that she change her place of employment. This was made clear by the following evidence given by the applicant in relation to the Kodaly course:

``You just felt to get a better position in music teaching you had to do that course? - At that stage I had one undergraduate degree. In 1979 I completed a second undergraduate degree. There was no other higher qualification available to me in Tasmania, so I had two undergraduate degrees and no higher ones and I felt this could be the thing that would separate me from other people applying for positions anywhere.''

11. In September 1979 the applicant became aware of a vacancy for a position of lecturer in music at a private college located in the city where her husband was to take up his new appointment. Because the position was advertised on the basis that the successful applicant was to take up duty at the beginning of the 1980 year the applicant taxpayer did not submit a written application at that time. However she did have discussions with the College and those discussions resulted in a written application dated 28 December 1979 (Exhibit B). It is apparent that the College was aware of the applicant's scholarship and study

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overseas. In due course the applicant was advised of an offer of the position of lecturer by a letter dated 20 June 1980. However, it is clear from the evidence that from early 1980 the applicant had an understanding with the College that she would be appointed and the College was merely awaiting her return from overseas before formalising the appointment.

12. It is also clear that the applicant was of the view that completion of the course of study under the scholarship would enhance her prospects of securing the lectureship at the College. As already noted the applicant had applied for the scholarship many months before she became interested in the appointment at the College.

13. In her evidence given while being cross-examined, she stated:

``So, you were teaching children as an experiment in Kodaly? - Yes, but without any training, and this is what, I suppose, made me want to apply for a scholarship to do it, because I felt that I needed to find out how to do it properly and, I mean, reading a book and doing it is not really the right way to be teaching it.

Why did you feel there was a need to follow up on this particular form of teaching? - Because it has become a very established method of teaching in Australian schools. There was an experimental project going on in Sydney at the time, which has now been running for 16 years. The course at [...] College was entirely based on the Kodaly program because the previous teacher had been Kodaly trained. The Catholic schools and the Education Department in Queensland were basing their new programs on that method, and at that time there were very few people who had actually studied it anywhere else. I was the third person from Australia to go to Hungary, and the other place to go was America, and very few people had done that at that stage.''

14. The applicant's term of employment under contract at the College of Advanced Education ceased on 21 December 1979 (Exhibit 1). Although the respondent's representative sought to establish through the applicant that she had tendered a notice of resignation in writing the applicant had no recollection of such a letter and such a letter was not before the Tribunal. Whether the applicant formally resigned or she merely refrained from having the annual contract renewed seems to be of little consequence to the issue before the Tribunal. The fact is she ceased to be employed as a tutor at the College of Advanced Education in anticipation of her travel overseas and her relocation to another State with her husband.

15. The applicant did not obtain any formal qualifications by completing the Kodaly course although she did receive a certificate to the effect that she had attended, the subjects studied and comments by her teachers on her progress. Similar circumstances apply to the course undertaken at the Finnish Music Academy.

16. There is no dispute as to the quantum of the claim. The living expenses included public transport, concerts, food and accommodation. $1,120 was spent on living expenses but $750 claimed. The basis of apportionment adopted by the applicant was not before the Tribunal. The applicant did not engage in recreational pursuits while absent from Australia.

17. The applicant commenced employment at the College in Brisbane before the end of the year of income in question but did not derive income by way of salary until the following year of income.

18. In essence the applicant's case is that the applicant was at all relevant times a teacher of music and she undertook the overseas trip for the purpose of improving her standing as a teacher of music. Her representative relied upon the decision of the Supreme Court of New South Wales in
F.C. of T. v. Smith 78 ATC 4157 involving a claim for self-education expenses by an assessor in the Australian Taxation Office.

19. On the other hand the respondent's representative relied upon the following decisions:

F.C. of T. v. Maddalena 71 ATC 4161; (1971) 45 A.L.J.R. 426

• 
  F.C. of T. v. Klan 85 ATC 4060
• Case Q89,
  83 ATC 454
• Case F16,
  74 ATC 73
• Case R81,
  84 ATC 551.

20. It is strange that the parties did not direct the Tribunal's attention to the decision of the

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High Court in
F.C. of T. v. Finn (1961) 106 C.L.R. 60; (1961) 12 A.T.D. 348. In the words of Dixon C.J. that case involved a claim for a deduction (C.L.R. p. 63; A.T.D. p. 348):

``... by a professional officer in the service of the Government of Western Australia. His claim is that he incurred the expenses of travelling in order the better to fit himself to perform the work which the Western Australian Government required of him...''

21. The claimed deduction before the High Court in Finn's case was an amount of £352 which related to part of a period of leave in Britain and Europe devoted to the study of architecture. It was admitted by the Commissioner that Mr Finn's activities abroad were confined to architecture and its study. Dixon C.J. was satisfied that Finn had devoted his available time ``to the advancement... of his architectural equipment, outlook and skill'' (C.L.R. p. 65; A.T.D. p. 349).

22. Mr Finn was a senior design architect in the Public Works Department and paid on the maximum of the salary range prescribed for his position. It would be by promotion only that he could go into a higher salary range. His evidence before the Board of Review, and used in the High Court, in response to a question as to whether he believed his period abroad would better fit him for promotion in the future was (C.L.R. p. 66; A.T.D. p. 350):

```I hope so. That was the whole point of the trip. I mean, this is purely from my side of it. The reason why I did it was that the Principal Architect was due to retire at the end of the year and there were two people senior to me, in seniority, and so the purpose of my trip was to gain the extra knowledge to fit myself to perhaps get possible promotion over them.'''

23. Before the Board of Review (Case K70
(1960) 10 T.B.R.D. 370 - decision dated 19 February 1960) it was established that up to the time of the hearing before the Board there had been no variation in the taxpayer's duties or his salary as a result of his trip (per Chairman at p. 373). Mr Finn travelled in Europe and Britain from May to September 1957 and then proceeded to South America. The assessment for the year of income ended 30 June 1957 was the assessment before the Board and the High Court. Considerable time had elapsed, it may be assumed, before the matter came on for hearing before the Board of Review.

24. Dixon C.J. elucidated the law relating to subsec. 51(1) at C.L.R. pp. 66-67; A.T.D. p. 350 as follows:

``The words of s. 51 which are most material to the primary question on which the taxpayer's claim to a deduction depends are `incurred in gaining or producing the assessable income'. With respect to this phrase, before the consolidation of 1936 was made it was remarked that `the expression `in gaining or producing' has the force of `in the course of gaining' and looks rather to the scope of the operations or activities and the relevance thereto of the expenditure than to the purpose itself'.
Amalgamated Zinc (De Bavay's) Ltd. v. F.C. of T. (1935) 54 C.L.R. 295 at p. 309. In
Ronpibon Tin N.L. and Tongkah Compound N.L. v. F.C. of T. (1949) 78 C.L.R. 47, at p. 56 the judgment of the Court contained two or three comments that may be relevant. It was said, `No doubt the expression `in carrying on a business for the purpose of gaining or producing' lays down a test that is different from that implied by the words `in gaining or producing'. But these latter words have a very wide operation and will cover almost all the ground occupied by the alternative.' (1949) 78 C.L.R., at p. 56. Again, `For expenditure to form an allowable deduction as an out-going incurred in gaining or producing the assessable income it must be incidental and relevant to that end.' (1949) 78 C.L.R., at p. 56. There is a third comment which may be added though perhaps it does not go so far, `In brief substance, to come within the initial part of the sub-section it is both sufficient and necessary that the occasion of the loss or outgoing should be found in whatever is productive of the assessable income or, if none be produced, would be expected to produce assessable income.' (1949) 78 C.L.R., at p. 57.''

25. Dixon C.J. concluded that the expenditure claimed was incurred in gaining or producing assessable income and that sec. 51 does not require that the assessable income be assessable income of the current year of income.

26. His Honour then went on to consider whether the expenditure should be held to be

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outgoings of capital or of a capital, private or domestic nature. That question he answered in the negative with the following dicta at C.L.R. pp. 68-69; A.T.D. pp. 351-352:

``The money was laid out by the taxpayer in the acquisition of better knowledge of a skilled profession. The pursuit of information concerning the modernization or improvements in an art is part of the constant process of keeping up to date which skilled professions call upon those who practise them to pursue, though sometimes in vain. Had he dwelt nearer to the sources of such knowledge and information he doubtless would have visited them from time to time in his career. As it was he had been able to do so only once before and in the meantime had depended on literature. It is simply a false analogy to treat him in his visit abroad as engaged in the equivalent of the acquisition of something of an enduring nature and therefore capital. You cannot treat an improvement of knowledge in a professional man as the equivalent of the extension of plant in a factory. Unfortunately, skill and knowledge of most arts and sciences are not permanent possessions: they fade and become useless unless the art or the science is constantly pursued or, to change the metaphor, nourished and revised.''

27. Kitto J. was of the same opinion as the Chief Justice but gave reasons which tended to concentrate on whether the taxpayer was acting within the scope of his office of senior design architect in the Public Works Department. At C.L.R. p. 69; A.T.D. p. 352 his Honour had this to say:

``The respondent incurred the expenditure during a period of leave, and in carrying out activities beyond any which had been or could lawfully have been specifically required of him by the Government. But it was nevertheless in my opinion incidental to the proper execution of his office and not otherwise that he engaged in those activities. For the office was of a kind which by its nature made incumbent on the occupant much more than the performance of set duties at set times. Its professional status implied an obligation of progressive acquaintance with a living and developing art.''

28. Kitto J. was satisfied that the taxpayer undertook the travel within the scope of his office and therefore in the gaining of his salary. It should be noted that Kitto J. was not concerned as to whether the overseas travel would lead to an increase in that salary.

29. Windeyer J. also agreed with the Chief Justice emphasising as had the Chief Justice that each case of this kind must depend on its own facts. His Honour was prepared to state a broader proposition than the other members of the Court at C.L.R. p. 70; A.T.D. p. 352 as follows:

``Generally speaking, it seems to me, a taxpayer who gains income by the exercise of his skill in some profession or calling and who incurs expenses in maintaining or increasing his learning, knowledge, experience and ability in that profession or calling necessarily incurs those expenses in carrying on his profession or calling. Whether he be paid fees by different persons seeking his skilled services from time to time, or be paid a regular salary by one person employing him to exercise his skill, matters not in my opinion.''

30. In
F.C. of T. v. Hatchett 71 ATC 4184. Menzies J. held that there was a plain connection between the obtaining of a Teacher's Higher Certificate and the gaining of assessable income because the certificate resulted in additional income being derived in the following year of income. However his Honour held that fees paid to a university for a Bachelor of Arts course had a problematical and remote relationship with assessable income having regard to the taxpayer's lack of success in passing the university examinations.

31. At p. 4187 his Honour stated the test as follows:

``The test to be applied is a more stringent one, namely were the outgoings incurred in gaining assessable income?

Here I am not dealing with the general question whether the payment of university fees can ever afford a deduction from assessable income; I am dealing with the particular question whether the fees paid by the taxpayer in the circumstances already stated are deductible... there must be a perceived connection between the outgoing and assessable income. Had the taxpayer

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paid fees for subjects in the Faculty of Law, it would, I think, have been obvious that the fees were not allowable deductions. In my view the payment of such fees would have as much connection with the taxpayer's assessable income as the fees in fact paid.''

32. His Honour then went on to discuss the decision of the High Court in Finn's case drawing attention to the fact that Windeyer J. adopted the wording of the second positive limb of sec. 41(2) in his judgment (quoted above). Menzies J. concluded that there must be a connection between the expenditure and assessable income and while he was able to find that connection in relation to the Higher Teacher's Certificate he could not find it in relation to the university fees. Clearly Hatchett's case does not stand for the proposition that university fees cannot be deductible. Rather, it illustrates that each case must be determined on its own facts, the decision depending on whether there is sufficient connection between the outgoings and the taxpayer's assessable income.

33. Two cases tending to point the other direction are F.C. of T. v. Maddalena 71 ATC 4161; (1971) 45 A.L.J.R. 426 and F.C. of T. v. Klan 85 ATC 4060. It may be an indication of the difficulties in this area when it is noted that in both of these cases the Commissioner of Taxation succeeded in having decisions of Taxation Boards of Review reversed in the courts.

34. Maddalena's case involved claims for deductions in respect of legal expenses and travel expenses incurred by a professional footballer (who was also an electrician) in seeking and obtaining a contract to play rugby league football with another club. The High Court rejected the claim holding that the expenditure was neither incurred in gaining or producing his assessable income nor necessarily incurred in carrying on a business.

35. The leading judgment was given by Menzies J. (less than two months prior to his Honour's decision in Hatchett). In the course of his judgment his Honour said at ATC p. 4163; A.L.J.R. p. 427:

``It is, I think, worthwhile looking at the taxpayer's earnings as an electrician to illustrate what I regard as the decisive difference to be observed here. Had the taxpayer claimed as a deduction the expenses of changing from one job to another as an employee electrician his outlay would not have been an allowable deduction. The expenditure would have been incurred in getting, not in doing, work as an employee. It would come at a point too soon to be properly regarded as incurred in gaining assessable income. Nor would the expenditure have been an outgoing in carrying on a business. There is a difference of first importance for present purposes between an electrician who seeks work as an employee and an electrician who seeks contracts to do work as a principal. In the former case the electrician would not have a business; in the latter he would. In the latter, therefore, what he spent to obtain contracts to do electrical work would be properly regarded as an outgoing of his business. There is, however, a clear distinction between the two cases.''

36. It is clear enough, in the context of the present application, that if the applicant had undertaken the courses of study for the purpose of qualifying herself for the appointment at the College then the relevant outgoings would have been incurred in getting work as an employee; it would have come at a point too soon to be regarded as incurred in gaining assessable income. However, the facts of this case show objectively that the purpose for undertaking the course of study was to improve the applicant's knowledge of music teaching methods. I am satisfied that the decision in Maddalena's case does not apply to the facts of this application.

37. Klan's case was relied on before the Tribunal by the respondent. Mr Klan was a history teacher at a private school in Australia (at Southport). He resigned that post and travelled to the United Kingdom with his family for two purposes. The first was to obtain teaching experience in a British school and the second was to carry out research in Germany in connection with a thesis he was preparing for a higher degree at an Australian university. The taxpayer returned to Australia and was successful in obtaining an appointment at a different school at a higher remuneration. The Supreme Court of Victoria (Ormiston J.) upheld the Commissioner's appeal against a decision of Taxation Board of Review No. 2 whereby the Board allowed the claim for deduction of the travel expenses.

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38. Mr Klan planned on remaining in Britain for three or more years. However for reasons which are set out in his Honour's judgment (p. 4061) that period was considerably shortened and he returned to Australia after approximately 12 months away from Australia.

39. Although the respondent relied on the authority of Klan's case in these proceedings there are difficulties with defining the authority of his Honour's decision. These difficulties appear early in the judgment where his Honour had this to say at p. 4064:

``It is obvious that the payments were made in a year in which assessable income was earned, but it is equally clear that they were in no way incidental and relevant to the earning of his salary at the Southport School in Queensland. The expenditure was incurred after he had resigned from that post, although perhaps a day or so before he left his teaching post at that school. If they were immediately incidental and relevant to the earning of any income, it was the earning of his somewhat delayed stipend at the Rydal School in Wales. Even then they were payments preliminary to taking up that position, but the most obvious objection argued on behalf of the Commissioner was that such income was exempt income and outside the operation of sec. 51.''

40. His Honour then proceeded to analyse the decisions in this area commencing with Finn and Hatchett. He was critical of a line of first instance decisions which appear to have placed undue emphasis on the ``perceived connection'' test used by Menzies J. in Hatchett's case coming to the conclusion that perhaps those authorities need to be reconsidered. However, as I said in Case T78,
86 ATC 1094 at p. 1099 this Tribunal is bound to apply the law as it has been interpreted by the courts and it is not appropriate that the Tribunal undertake a review which is clearly the responsibility of an appeal court. I note that Ormiston J. also refrained from expressing any opinion as to whether the earlier decisions were correctly decided.

41. In deciding this application I need go no further than say that Klan's case is clearly distinguishable from the facts of this case. Mr Klan incurred the travel expenses for the purpose of obtaining employment in Britain and thereby deriving exempt income. A secondary purpose was to undertake research in Germany. The expenditure was incurred in getting work to earn exempt income. These considerations do not apply in the present application.

42. The present application is not one to which Klan's case applies because it does not concern expenditure incurred for the purpose of getting work. The applicant was at all relevant times a teacher of music (albeit an unemployed teacher of music while she undertook the courses) and she applied for and undertook the courses in Europe for the purpose of increasing and updating her knowledge as a music teacher. In undertaking the Kodaly course she had no other purpose. That undertaking the course assisted her in obtaining the position at the College does not disqualify the expenditure from being deductible.

43. I have therefore come to the firm conclusion that the expenditure claimed is an allowable deduction on the authority of Finn's case. No issue arises in this case under sec. 82A of the Act.

44. The objection decision under review will be set aside and the objection allowed in full.