Case V132

Members:
RA Layton DP
DJ Trowse M
DB Williams M

Tribunal:
Administrative Appeals Tribunal

Decision date: 29 August 1988.

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R.A. Layton (Deputy President), D.J. Trowse and D.B. Williams (Members)

The issue to be determined in this application for review is whether the sum of $3,516 claimed by the applicant in respect of study for a Graduate Diploma of Computing Science is an allowable deduction pursuant to sec. 51(1) of the Income Tax Assessment Act 1936 (``the Assessment Act'').

2. The evidence before the Tribunal comprised supplementary documents lodged with the Tribunal and additional documents tendered during the course of the hearing. The applicant gave evidence under oath and called Mr Harrington, who in 1984 was a computer systems officer with the South Australian education department and the assistant manager of the computing division, and Mr McKay, the chief systems officer of the systems branch of the South Australian highways department, to give evidence. The Commissioner's representative called Miss Harris, a librarian with the library resources branch of the education department. At the hearing, the applicant was represented by his tax agent and the respondent was represented by an officer of the Commissioner.

3. The applicant's representative submitted that the expenditure incurred by the applicant in undertaking the computer course was incurred in gaining or producing assessable income for the year ending 30 June 1985, within the meaning of sec. 51(1) of the Assessment Act. The Commissioner's representative, whilst not disputing the amount claimed as expenditure or that the expenditure was incurred in attaining the graduate diploma, namely $3,516 less $250 (being excluded from any deductibility pursuant to sec. 82A of the Assessment Act), rejected the applicant's claim that the expenditure was incurred in gaining or producing the assessable income, and submitted that it was expenditure of a private nature unrelated to his employment.

4. The Tribunal makes the following findings of fact. The relevant taxation year is that ending 30 June 1985. During that year, the applicant was employed as a librarian grade I in the cataloguing section of the library resources branch of the South Australian education department. His qualification at this time was a Bachelor of Science with a major in physics, but he held no qualifications as a librarian. The applicant's duties as a librarian grade I involved the cataloguing of material into various computer data bases for use by school and departmental libraries. Previously, cataloguers used a manual system, but in the relevant tax year, the cataloguers were required to use an on-line data base system (see job specification, duty statement (Exhibit R4)). The applicant, because of his practical computing experience and skill combined with knowledge he acquired from the computing course, became a ``troubleshooter'' if computer lines failed, and he was called upon to restore the system. In addition, on one occasion the applicant set up a small program on to hard disk for a newly acquired computer terminal. These latter computing duties fell within ``other duties as directed'' on his duty statement (see transcript, p. 29).

5. Early that year, in February 1985, the applicant commenced studying as an external student with Deakin University for a Graduate Diploma in Computing Science. He successfully completed the course in December 1987. The reasons stated by the applicant for undertaking the course were to enable him to perform his duties more efficiently and to enhance his chances of promotion to a librarian grade II in the education department, and eventually to advance to the position of computer systems officer within that department or another government department (transcript, p. 12). The applicant gave evidence that prior to applying to undertake the course, he had discussed the likelihood of his being promoted to computer systems officer with Mr Harrington, the acting head of the computer section, and Mr Harrington had indicated the applicant's chances of promotion would be improved if he completed the course, given also that the applicant had had a great deal of ``hands-on'' experience.

6. However, at the relevant time, the applicant was employed as a librarian grade I and he could not have been promoted further to librarian grade II at an increased salary without librarian qualifications. The applicant stated that at this time, a review was pending and he understood it was likely that the review of requisite qualifications would result in a recommendation that the barrier of librarian qualifications be removed. The applicant anticipated that if this barrier were removed, his computing course would assist him to

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achieve promotion to a librarian grade II position. New regulations to remove the librarian qualifications barrier were eventually gazetted in May 1988, and were made retrospective to December 1986.

7. The review and subsequent removal of the barrier with respect to librarian qualifications did not, as conceded by the applicant, specify computing qualifications as a prerequisite for promotion to a librarian grade II. In fact, there was no stipulation made as to the requisite qualifications. At the highest, if the applicant's evidence is accepted, persons seeking promotion who had a computing background, may be given preference over other applicants qualified in other fields. Miss Harris supported this view, stating computing qualifications, although desirable, were not necessary for promotion as a librarian (transcript, p. 30).

8. In July 1986, the applicant applied for the position of computer systems officer grade I in the highways department. The qualifications required for this position were ``appropriate tertiary qualifications or... knowledge and skills [acquired] through experience and/or in service training''. The applicant was successful in his application and transferred from the education department to the highways department in late 1986 and received an increased level of annual income.

9. The applicant gave evidence that, even if a position as a librarian grade II or computer systems officer had become available in the education department prior to the position advertised by the highways department, he would not have automatically been promoted to either of those positions. Certainly, accepting Mr McKay's evidence, the applicant was successful in his application to the highways department because he had almost completed his computing studies. But, with respect to promotion within the education department, even if the applicant had completed his computing course, there was no guarantee of promotion. The position would have been advertised, and although Mr Harrington gave evidence that the applicant would have been considered favourably, he would still have had to apply along with other applicants for the position.

10. Turning now to consider the legal criteria as set down by sec. 51(1) of the Assessment Act. Section 51(1) provides:

``All losses and outgoings to the extent to which they are incurred in gaining or producing the assessable income, or are necessarily incurred in carrying on a business for the purpose of gaining or producing such income, shall be allowable deductions except to the extent to which they are losses or outgoings of capital, or of a capital, private or domestic nature, or are incurred in relation to the gaining or production of exempt income.''

Inherent in this subsection are two tests: losses and outgoings are allowable deductions only to the extent to which they are, firstly, incurred in gaining or producing the assessable income or, secondly, to the extent that they are necessarily incurred in carrying on a business for the purpose of gaining or producing such income. In either case, even if expenditure falls within the meaning of the subsection, it may be excluded by the excepting provision, namely, ``except to the extent to which they are losses or outgoings of capital, or of a capital, private or domestic nature...''. In the present reference, we are concerned with the first limb of sec. 51(1), namely, whether or not the expenditure incurred by the applicant was incurred in gaining or producing the assessable income (we are not concerned with the carrying on of a business). Further, it will be a rare case where expenditure falling within the exclusionary provision being of a private or domestic nature, will not be initially disallowed by the qualifying criteria of the subsection itself (see Menzies J. in
F.C. of T. v. Hatchett 71 ATC 4184 at p. 4186).

11. Self-education expenses incurred by a taxpayer, to be eligible for deduction pursuant to sec. 51(1), must have the necessary connection with the production of the taxpayer's assessable income. If such expenses are proven to have the necessary connection, they are allowable as deductions in full, unless these expenses also fall within the definition of ``expenses of self-education'' in sec. 82A of the Assessment Act, in which case the first $250 of these expenses is not deductible. Thus, the positive limbs of sec. 51(1) are not concerned with the nature of the expense, but the nexus between the expense and the production of income.

12. Helsham J. in
F.C. of T. v. White 75 ATC 4018, after considering the authorities, delineated useful guidelines with respect to

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expenses potentially falling within sec. 51(1) of the Assessment Act which can be summarised as follows:

• (1) such expenses need not be related to income of the year of claim;
• (2) it is not enough that the expenditure is a prerequisite to earning the assessable income in the sense that the particular income could not have been earned without such expenditure;
• (3) the acquisition of knowledge is not to be treated as a outgoing to acquire a capital asset and therefore expenses involved are not to be treated as expenses of a capital nature;
• (4) encouragement by the employer to undertake education relevant to the employment is not, on its own, sufficient to bring the expenses of such study within the ambit of sec. 51.

It is worth quoting Helsham J.'s conclusion at length:

``... expenses incurred in pursuing studies associated with employment will qualify as allowable deductions under sec. 51 when it can be said that those studies are part and parcel of the employment, which means that the expenditure is incurred in the process of carrying out the employee's duties, or, even if they are not such, they can be seen to have a direct effect on income. Where that cannot be seen, I think it will be difficult to establish the necessary connection between the study activity and the employment so as to give study expenses the character of outgoings incurred in gaining or producing the income derived from the employment.''

(75 ATC 4018 at p. 4022).

13. Applying these four guidelines to the present reference. As to the first guideline, it is not disputed that the applicant incurred the expenses in the year of income assessed. The applicant, however, seeks to relate the expenses to an increased income which he began to derive when he was appointed a computer systems officer grade I in late 1986, that is, to the taxation year ending 30 June 1987, which is two years after incurring the expenditure. This temporal difference is not of itself an impediment if the applicant is able to demonstrate the necessary nexus between the incurring of the expense and the production of that increased income
F.C. of T. v. Klan 85 ATC 4060).

14. Alternatively, the applicant seeks to relate the expenses to the prospective increase in salary following potential appointment to librarian grade II following the removal of the librarian qualification requirement. The applicant was never appointed to this position and, in any event, the barrier to his appointment was not removed until after he had obtained his position in the highways department. A mere possibility of promotion will not be a sufficient connection between the expenditure claimed and the income produced (see Case Q30,
83 ATC 129). At the time when the applicant incurred the expense, there was no more than a possibility of promotion within the library resources branch of the education department from a librarian grade I to a librarian grade II position. The barrier of librarian qualifications was still in place, and even if it were foreseeable at that time that the barrier would be removed, there was still only the possibility of the applicant being promoted, depending on whether a position became available and, if so, whether he was the successful applicant.

15. In the further alternative, it was submitted that the expenditure incurred in undertaking the course was relevant to the duties the applicant in fact performed as a librarian grade I in that he deployed the skills he learnt in that course in the performance of his librarian duties. As to this submission, whilst the applicant was no doubt using in a peripheral way the information derived from his course in the performance of his duties, he was still employed as a librarian and not a computer systems officer. These skills were helpful but not essential for the performance of his duties, and the expenses associated with gaining those skills were not incidental or relevant to the gaining of that income.

16. In regard to the second guideline, it is not sufficient for the applicant to prove that his increased earnings are a result of his completion of a computing course, and hence of the expenditure incurred. It may well be that, in retrospect, the applicant is now in a better position financially as a result of undertaking the computing course, but to quote the High Court in
Ronpibon Tin N.L. and Tongkah Compound N.L. v. F.C. of T. (1949) 78 C.L.R. 47 at p. 56:

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``For expenditure to form an allowable deduction as an outgoing incurred in gaining or producing the assessable income it must be incidental and relevant to that end.''

To incur expenditure by undertaking a study program in order to be in a better position to obtain more remunerative work in a different field of employment is not an expenditure which is incidental or relevant to the gaining of assessable income. It is not expenditure incurred in working as an employee, but is instead an expense incurred in gaining employment (see Case V7,
88 ATC 142). It follows that, as those payments were of ``moneys spent to obtain her employment'', they were not allowable deductions as outgoings in gaining or producing assessable income (see Menzies J. in
F.C. of T. v. Maddalena 71 ATC 4161). In this case, the applicant's submission regarding expenditure in relation to his employment as a computer systems officer in the highways department must fail.

17. The possibility of an increase in salary at some time in the future upon promotion to librarian grade II, did not eventuate and, in any event, was dependent on unforeseen contingencies such as the outcome of the review on qualifications, the availability of grade II positions and the competition for any such positions at some unknown time in the future. These uncertainties when taken together, lead to the conclusion that the necessary nexus between income and expenditure did not exist.

18. As to the third guideline, it was established by Menzies J. in Hatchett's case (supra) that the acquisition of knowledge should not be treated as a capital asset, and therefore automatically excluded. But the onus remains on the taxpayer to prove that the acquisition of knowledge was incurred in deriving the assessable income within the meaning of sec. 51(1) and not expenditure of a private nature, as stated by Senior Member P.M. Roach in Case V13,
88 ATC 163 at p. 168:

``The factors which distinguish learning-experiences which fall in the former category from those which fall in the latter category are not easily or precisely defined.''

But where the taxpayer is under no professional obligation to keep abreast of changes within a specialised field, it will be difficult to prove that such acquisition was other than of a private nature. It is different from situations in which taxpayers are members of skilled self-employed professions which require the constant updating of knowledge and its application. In such circumstances, expenditure incurred in acquiring knowledge may fall within sec. 51(1) (see for example
F.C. of T. v. Finn (1961) 106 C.L.R. 60).

19. Of particular relevance is the fourth guideline, that even if an employer encourages an employee to undertake study, this per se is insufficient to bring such study within the meaning of sec. 51(1). Such study must be ``part and parcel of the employment''. Menzies J. in Hatchett (supra) (at p. 4187) stated the principle in these terms:

``Enlightened employers often encourage employees to improve their bodies and their minds, and assist them to do so. Such encouragement is not, of itself, enough to warrant the deduction of outgoings for these purposes. The test to be applied is a more stringent one, namely were the outgoings incurred in gaining assessable income?''

20. For reasons previously expressed, it was not necessary for the applicant, in his employment as a librarian, to undertake the computing course. It may well have been advantageous for his employers, and they may have indeed encouraged such study, but if he had decided not to complete further study, it would have in no way prejudiced his employment as a librarian. Therefore, however desirable or advantageous to a taxpayer's employment, self-education expenses undertaken on a taxpayer's own initiative will not be allowable deductions under sec. 51(1) of the Assessment Act unless it can be established that the course of study is closely connected with the duties required in his employment. Support for this view is found in Case R60,
84 ATC 447 where a public servant was disallowed self-education expenses incurred in obtaining a law degree because, although such legal qualifications were recognised as an advantage for the position and were relied upon by the taxpayer's superiors, his employment would not have been prejudiced if he decided not to further his education.

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21. For the above reasons, the Tribunal finds that the applicant incurred the expenditure in gaining a position in a new field of employment and therefore no deduction should be made for this expenditure. The Commissioner's decision on the objection is upheld.