CASE 14/94

Members:
BH Pascoe M

Tribunal:
Administrative Appeals Tribunal

Decision date: 18 March 1994

BH Pascoe (Member)

This is an application to review a decision by the Commissioner of Taxation to disallow an objection lodged by the applicant against an assessment of income tax in respect of income for the year ended 30 June 1990.

2. With the return of income for the year ended 30 June 1990, the applicant lodged a request for a ruling pursuant to section 169A of the Income Tax Assessment Act 1936 (``the Act'') as amended. The request related to two different matters. The first sought confirmation that the applicant was entitled to a deduction amounting to $2846 for expenditure incurred in undertaking a Master of Arts (Criminology) course part-time at the University of Melbourne. The second matter related to a receipt of $50 received from a television broadcaster and argued that the amount should not be regarded as assessable income. The notice of assessment which issued on 18 January 1991 disallowed the self-education expense deduction and included the $50 as assessable income. The applicant lodged a notice of objection on 18 March 1991, objecting against the disallowance of the expense claimed and claiming a further deduction of $3013 for expenditure said to have been necessarily incurred in earning the $50 fee. The objection was disallowed and the decision was conveyed in two letters. By letter dated 22 July 1991, the respondent disallowed the objection against the non-allowance of self-education expenses and, by letter dated 7 August 1991, disallowed the objection in relation to the $50 fee and related expenditure.

3. At the commencement of the hearing the parties advised that a settlement had been reached in relation to the second matter and a copy of an amended assessment which excluded the $50 from assessable income was tendered. Thus the balance of the hearing was occupied solely with the question of deductibility of the expenditure incurred in self-education expenses.

4. The applicant is, and was during part of the relevant year, employed by the Australian Taxation Office as an auditor. Between 1973 and 1979 he completed a Bachelor of Economics degree part-time whilst employed by a bank. From 1980 to 1982, he was employed by a rural supplies company but from 1982 until December 1988 was unemployed. During this latter period, he was engaged in an unpaid capacity in research, submission preparation, publicity and lobbying for prison reform groups. During 1984 and 1985, he completed, part-time, the preliminary year of a Master of Commerce degree but did not continue beyond that preliminary year. In October 1988 he applied for admission to undertake a Master of Arts (Criminology) candidature by thesis and course work.

5. The applicant commenced employment with the Australian Taxation Office in December 1988, when he was 33 years of age. Initially, he was appointed to a basic clerical position in Sales Tax Operations. In February 1989 he applied for and was granted a transfer to the income tax enquiries section from 1 March 1989, with promotion from Administrative Services Officer Class 1 to ASO3 (``ASO1''). In December 1989 he applied for a position in the audit section at an ASO4 level. He was accepted and remains in audit and at that ASO4 level.

6. The applicant was not represented at the hearing and produced three witnesses in addition to his own sworn evidence. Mrs D. Greig, a lecturer in criminology, gave evidence as to the content and requirements for completion of a degree of Master of Arts (Criminology). Mr Pickering, an officer of the Australian Taxation Office attached to the complex audit section, gave evidence on the nature of audit work within that office and Mr D'Arcy, another officer of the Australian Taxation Office, gave evidence on the staff promotional and appeals system within the office.

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7. The respondent was represented by Mr B. O'Neill, an officer of the Australian Taxation Office, who produced one witness, Mr McEvoy, the group head of business audit in the Melbourne office of the Australian Taxation Office.

8. There were some difficulties in obtaining clarity of submissions and evidence in the hearing. Apart from the one witness for the applicant, all others involved in the hearing were employed by the Australian Taxation Office with varying levels of authority, which resulted in a deal of reluctance to make positive statements. It became clear that the applicant was regarded within the office as one who constantly sought to challenge and disagree with established policies and procedures. Consequently, much of the evidence was directed at what might be described as ``office politics'' rather than the specific question of the deductibility or otherwise of the expenditure incurred. In particular, I gained a clear impression that Mr McEvoy tried very hard not to agree with any proposition put to him by the applicant in cross-examination but preferred to hedge his responses in a somewhat oblique manner. A further factor which loomed large in the respondent's approach to this case was the applicant's high public profile in the prison reform movement. Another political consideration confusing the issue was the subsequent activities of the applicant as a union official involved in negotiating employment terms and conditions with the respondent. There was a clear impression conveyed that the hearing on this matter was part of a different agenda.

9. Much of the evidence provided by both parties was opinion. Little factual evidence on the relativity of the course undertaken by the applicant to the carrying out of his duties or to promotion prospects was provided by the witnesses other than the applicant himself. Whilst Mrs Greig understood the course content, she knew little or nothing about the applicant's duties. None of the Taxation Office witnesses was familiar with the course of study being undertaken by the applicant.

10. The applicant enrolled in the course on 2 March 1989. The course requirement was to undertake course work and submit a minor thesis in three subjects, undertake a course of supervised reading and provide an 18,000 word thesis on an approved topic. The three subjects selected by the applicant were:

The first of these subjects is described in the University Faculty Handbook as:

``An introduction to criminology as an academic discipline and an analysis of the nature and scope of criminology defining deviant and criminal behaviour. The nature and purpose of criminal law. History and evolution of criminological thought. The relationship between criminology and other academic disciplines. Problems in criminological theory. Political and ethical issues in criminological research.''

The second subject is described as:

``The concept of discretion. Discretion and justice. Discretion and the rules. The nature and role of discretionary judgments. Problems associated with the exercise of discretion. The control of discretion: structuring, confining and checking discretion. A review of discretionary judgments and the techniques for controlling the discretion exercised in law enforcement, in prosecution, and by judicial officers.''

No greater description of the third topic is contained in the Handbook.

11. On 20 March 1989 and again on 5 February 1990 the applicant applied for studies assistance to the Australian Taxation Office. The studies assistance scheme provided reimbursement of compulsory tuition and examination fees and access to study and examination leave. These applications were approved. In the 1989 calendar year the applicant took 25 days study leave and a further 45 days approximately in the 1990 calendar year. In his 1989 application, after setting out the subject to be studied, the applicant stated his reasons for undertaking the course as:

``I will be studying the exercise of discretions within the ATO in the subject `Discretionary Judgment', `Criminological Perspectives' will cover criminology generally, `Advanced Issues' is about theory and method in Criminology, while in 1990, the reading unit and thesis will be on

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penology. These studies will improve my understanding of discretions in the ATO, provide a framework for prevention of tax evasion, provide an opportunity to make a reasoned contribution to prison reform and qualify me for a Ph.D which I am interested in taking up in the field of Economics.''

12. In her evidence Mrs Greig, when asked to explain criminology in plain language, provided the following explanation:

``Well, it is fairly akin to sociology in that its focus is to look at social order and therefore social disorder and the reasons for that disorder and what we can do about it, so that means it branches into the whole issue of sanctions, not only sanctions within the criminal justice system, but the various rules which society devises to make people conform and so it would look at regulatory bodies and it would look at specialised settings, such as hospitals and schools, so it is exceedingly broad. It looks at the effectiveness of these regulations or sanctions or ways in which we try to make people comply. It looks at the visibility or otherwise, so that we've begun in I suppose the last 20 years or so to become very aware of the way in which discretion is a very strong component in allocating people to formal sanctions or diverting them in other ways and still trying to get the intended outcome and it looks - when I said it looks at the effectiveness of sanctions, it looks at the unintended outcomes, too, so that, you know, is this the most efficient way to achieve the result, or does it have some sort of harm on the person concerned and it looks at the way these sanctions operate in particular settings. Essentially it is concerned with the relationship between the individual and society and social control processes.''

13. In summary the applicant's arguments in support of the deduction for the expenditure incurred were:

On the other hand, the respondent's arguments against the deductibility of the expenditure can be summarised as:

14. The applicant was clearly concerned at the apparent inconsistency of his employer. One officer, in the capacity of Studies Assistance Officer, approved the application for studies assistance presumably having had regard to the criteria set out on the application form which required consideration of the applicant's duties and work performance, the operational needs of the department and the service and the needs of the applicant's career development. On the other hand, another officer, in the capacity of an Advising Officer, disallowed a deduction for the expenditure incurred in pursuing that approved course as not having the necessary connection with the production of the taxpayer's assessable income. Given that these were opinions of two different officers in different sections of a very large organisation and the judgmental nature of the decisions the apparent difference of views is not surprising. Mr McEvoy sought to clarify the possibility of inconsistency by suggesting that the studies assistance officer at the relevant time was ``a fairly junior officer'' and that the programme ``got rather out of hand''.

15. The applicant gave evidence that on joining the Australian Taxation Office he decided that he would stay with that organisation for a least 10 years and set himself promotional goals. He considered that further

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study and qualifications would assist in reaching his goals and, knowing that he was entitled to enrol in the Master of Arts (Criminology), decided to pursue that course of study rather than any internal or other external courses available. Much of his evidence and questions of witnesses were directed at the relevance of the study of discretions and the need for a good understanding of the use of discretions in audit work. He argued and, notwithstanding some degree of hedging from Mr McEvoy, obtained agreement from the Taxation Office witnesses that an auditor is required to exercise discretion in varying degrees on a regular basis. He also sought to argue that the Australian Taxation Office is a law enforcement agency and a study of law enforcement, penalties and discretions must be of significant benefit for its officers. These arguments are a little at odds with the timing of the decision to enrol in the particular course. When the applicant applied for admission to the course he had no knowledge of a prospective position with the Australian Taxation Office. At the actual date on which he enrolled, he had one day's experience as an enquiry officer after moving from a clerical position in Sales Tax Operations. He had no expectation or intention at that time of becoming an auditor.

16. The applicant submitted that the Tribunal should find that his studies towards a Master of Arts (Criminology) degree contributed to his obtaining promotion to the ASO4 level in primary audit. The evidence does not allow such a finding. The best that can be said is that it may have. Mr D'Arcy, on whose evidence the applicant relied, had sat on eight selection committees to consider applicants for positions since 1978. He was not a member of the selection committee who considered the applicant's application and the best that he could say was that he would expect the selection committee to have taken the applicant's studies into account. However, it appeared clear that Mr D'Arcy was making a general comment on the possible value of additional studies and qualifications which may allow one candidate for a position to be seen as being ahead of other candidates where they may have been otherwise equal in all aspects. Given Mr D'Arcy's minimal knowledge of the subject matter of the applicant's course of study, he can only be seen as providing evidence that some additional study and/or qualification which had some relevance to the position under consideration may be useful in assisting an application for that position.

17. The specific relevance of the applicant's study in the year ended 30 June 1990 to his employment and the earning of his assessable income is difficult to establish. Some parts of the course studied during the year may have had some limited value after commencement of his work in the audit area of the Australian Taxation Office. However, a substantial amount of the course would have very limited, if any, relevance to his current or near future employment. In the long term and, if the applicant is promoted to a much more senior position, it is possible that the studies will be beneficial and relevant to employment. But that is considering a hypothetical future. It is relevant to take into consideration that, when the applicant committed himself on 2 March 1989 to incur the expenditure in undertaking the course of study, he had no knowledge or expectation of a position in the audit area of the Australian Taxation Office.

18. The respondent placed considerable weight on the fact of the applicant's high profile involvement in prison reform and submitted that the dominant motive for the course of study undertaken by the applicant was his prior and continuing involvement in that activity. The relevance of subjective purpose or motive in the determination of whether an outgoing is deductible under section 51(1) was considered by Hill J in the case of
FC of T v Studdert 91 ATC 5006. This case concerned the cost of flying lessons by a flight engineer employed by Qantas. It was argued by the appellant that the decision of the Administrative Appeals Tribunal from which he appealed that the flying lessons improved the taxpayer's efficiency as a flight engineer was not sufficient to make the cost of those lessons deductible and it failed to consider whether the taxpayer's dominant purpose in undertaking the flying lessons was to retrain as a flight officer. In dealing with this submission his Honour said (at page 5010):

``The submission raises once again the relevance of subjective purpose or motive in the determination whether an outgoing is deductible under s. 51(1).

The first limb of s. 51(1) says nothing of purpose or motivation. It postulates a question of fact, namely whether the outgoing was incurred in, that is to say, in

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the course of gaining or producing assessable income. The leading authority (at least out of the context of tax avoidance) on the role of purpose in the resolution of this question of fact, is to be found in
Magna Alloys & Research Pty Ltd v FC of T 80 ATC 4542; (1980) 49 FLR 183. In that case it had been found at first instance to be the fact that the outgoings for legal expenses of the directors on charges, inter alia, of criminal conspiracy, were incurred with the dominant motivation or reason of protecting the interests of the directors, albeit that the motive of protecting and preserving the taxpayer's business was also present. On this basis it was held that the amounts in question were not deductible under the second limb of s. 51(1) which, like the first limb, makes no reference to the purpose of the taxpayer, although it refers to the purpose of the taxpayer's business. The decision at first instance was overruled.

The leading judgment was that of Deane and Fisher JJ. Their Honours said (at ATC 4560-4561; FLR 210):

`An outgoing can, in the relevant sense, be necessarily incurred in carrying on a business notwithstanding that it flows from a sense of moral obligation to those involved in the business. In particular, the fact that the needs of some directors and agents provided the occasion of an outgoing and that the resulting benefits to directors or agents constituted the dominant motive of a taxpayer for incurring it does not, of itself, preclude the outgoing from being necessarily incurred in carrying on the taxpayer's business for the purposes of sec. 51(1). Whether a voluntary outgoing was so incurred depends upon the answer to the composite question which we have indicated, namely, whether the outgoing was reasonably capable of being seen as desirable or appropriate from the point of view of the pursuit of the business ends of that business and, if so, whether those responsible for carrying on the business so saw it.'

Although that case was decided under the second limb of s. 51(1), there is no reason to doubt that their Honours would have reached the same conclusion under the first limb. Indeed, as has often been remarked, the second limb adds little to the first limb (see eg
FC of T v Snowden & Willson Pty Ltd (1958) 11 ATD 463 at 464; (1958) 99 CLR 431 at 436). Brennan J, in Magna Alloys, actually pointed out in a separate judgment, reaching the same conclusion, that the same kind of factors were material whichever limb was considered. His Honour said (at ATC 4545; FLR 185) that:

`... neither motive nor either kind of purpose [subjective or objective] is a criterion of deductibility.'

At ATC 4547; FLR 189 his Honour expressed the relevance of purpose in the following terms:

`Though purpose is not the test of deductibility nor even a conception relevant to a loss involuntarily incurred, in cases where a connection between an outgoing and the taxpayer's undertaking or business is affected by the voluntary act of the taxpayer, the purpose of incurring that expenditure may constitute an element of its essential character, stamping it as expenditure of a business or income-earning kind.'''

Later (at page 5011) his Honour said:

``Whether one applies the twofold test of Deane and Fisher JJ, or that propounded by Brennan J, the answer in the present case is the same. Looked at objectively, the expenditure had the necessary connection (so it was held) with the gaining or producing of the assessable income of Mr Studdert. One of the purposes, at least of the expenditure, looked at objectively, was related to Mr Studdert's activities as a flight engineer. The essential character of the expenditure on the flight lessons can be seen to fall within the first limb of s. 51(1) and that character would not be lost because the principal or dominant reason for incurring the expenditure related to a possible application for retraining as a flight officer. It follows on either basis that it was not relevant to the decision to find whether the retraining motivation was or was not dominant.''

In this case, my view is that the applicant's dominant motive in undertaking the particular course of study was his interest and involvement in prison reform. However, this finding does not of itself preclude the

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deductibility under section 51(1). It does constitute an element of the essential character of the expenditure but if I am able to find that there is a manifest connection between the incurring of the expenditure and the derivation of assessable income then the applicant is entitled to succeed in his claim.

19. Unfortunately for the applicant, I am unable to find that manifest connection. I am of the view that the expenditure incurred by this applicant is more akin to the claim for university fees considered by Menzies J in
FC of T v Hatchett 71 ATC 4184; (1971) 125 CLR 494. This case concerned expenditure incurred by the taxpayer, a primary school teacher, in a course encouraged by his employer which in fact contributed to his fees. The course was such as to be necessary for promotion to the position of a headmaster or a deputy headmaster of a secondary school. His Honour said (at page ATC 4187; CLR 499):

``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. As I have said, I am not able to find any connection between the payment of fees and the assessable income of the taxpayer beyond the circumstance, which I take to be self-evident, that a teacher who has pursued university studies is likely to be a better teacher than if he had not done so and is therefore more likely to obtain promotion within the department. In my opinion this general consideration is not enough to make the fees deductible; there must be a perceived connection between the outgoing and assessable income.''

20. The applicant sought to distinguish his position from that of the applicant in a case dealt with by this Tribunal and reported as Case U101,
87 ATC 616. The applicant in that case was also employed as a Taxation Officer who undertook a course on communication, clear self-expression and work organisation. Purvis J sitting as a Presidential Member of the Tribunal affirmed the decision of the Commissioner of Taxation in disallowing the deduction claimed. His Honour said (at page 620):

``It cannot be said that the studies comprised in the course were part and parcel of the employment, nor were they incurred in the process of carrying out his duties as an employee of the respondent. Nor could it be seen that they would have a direct effect on his income.

Thus, the necessary nexus between the study activity and the employment, so as to give the study expenses the character of outgoings incurred in the gaining or producing of income derived from employment, is missing.

It is not enough as I have already indicated, that the course of study relevant to the employment pursued by an employee, `should be' likely to enable the employee the better to carry out his work, and hence obtain promotion. This be it even if encouraged by the employer.''

Although there might be seen to be some relevance to performance of duties in part of the studies pursued by this applicant, that relevance is relatively slight and the balance of the studies appear to have little or no relevance. I am unable to find sufficient in this applicant's arguments to distinguish his position from the decision in Case U101 (supra).

21. The applicant's submission that the approval by his employer for studies assistance is a significant factor in his favour can be speedily dealt with. As Menzies J said in Hatchett's case (supra) (at page 4187):

``The university fees were paid with the encouragement of the department; it contributed towards them. This, however, is not, of itself, enough to bring the fees within sec. 51. 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 for outgoings for these purposes. The test to be applied is a more stringent one, namely were the outgoings incurred in gaining assessable income?''

22. I have not been satisfied that the expenditure incurred by this applicant in undertaking the particular course of study represents outgoings incurred in gaining his assessable income. Consequently, the decision under review in relation to the claim for a deduction of $2846 for self-education expenses is affirmed and, in relation to the claim for exclusion of $50 from assessable income, the

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decision is set aside by consent pursuant to section 42C.

 

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