Anstis v Commissioner of Taxation
[2009] FCA 286
•1 April 2009
FEDERAL COURT OF AUSTRALIA
Anstis v Commissioner of Taxation [2009] FCA 286
INCOME TAX – Deductions – Outgoings incurred in the gaining or producing of assessable income – Assessable income in the form of Youth Allowance payable under the Social Security Act 1991 – Recipient of Youth Allowance required throughout the relevant period to undertake full-time study – Requirement of full-time study satisfied if recipient enrolled at an educational institution, undertakes at least three quarters of the normal amount of full-time study in respect of the relevant course and in the Secretary’s opinion is making satisfactory progress towards completing the course – Whether expenditure by taxpayer pursuing a teaching degree on travel to and from teaching rounds, student administration fees, text books etc, deductible from student’s assessable income pursuant to s 8-1 of Income Tax Assessment Act 1997 (Cth).
Income Tax Assessment Act 1997 (Cth) ss 6-5, 8-1, 11-5, 51-10, 51-35
Taxation Ruling TR 98/9
Social Security Act 1991 (Cth) Pt 2.11 Div 1, ss 540 and 541
Social Security (Administration) Act 1999 (Cth) s 41(1)
Income Tax Assessment Act 1936 (Cth) ss 51(1) and 82A(1)Lunney and Hayley v Commissioner of Taxation of the Commonwealth of Australia (1958) 100 CLR 478
Martin v Federal Commissioner of Taxation (1984) 2 FCR 260
Commissioner of Taxation v Finn (1961) 106 CLR 60
Federal Commissioner of Taxation v Hatchett (1971) 125 CLR 494
Federal Commissioner of Taxation v Smith (1978) 36 FLR 95
Federal Commissioner of Taxation v Lacelles-Smith (1978) 78 ATC 4162
Commissioner of Taxation v Cooper (1991) 29 FCR 177Ronpibon Tin NL and Tongkah Compound NL v Federal Commissioner of Taxation (1949) 78 CLR 47
Reid v Commissioner of Inland Revenue (1983) 6 TRNZ 495
Morris v Federal Commissioner [2002] FCA 616
Lodge v Federal Commissioner of Taxation (1972) 128 CLR 171
Inguanti v Secretary, Department of Social Security (1988) 80 ALR 307
Handley v Federal Commissioner of Taxation (1981) 148 CLR 182
John v Federal Commissioner of Taxation (1989) 166 CLR 417
Federal Commissioner of Taxation v Payne (2001) 202 CLR 93
Fletcher v Federal Commissioner of Taxation (1991) 173 CLR 1
Case N94 (1981) 81 ATC 507
Federal Commissioner of Taxation v Maddalena (1971) 2 ATR 541
Newsom v Robertson [1953] Ch 7
Federal Commissioner of Taxation v Finn (1961) 106 CLR 60SYMONE ANSTIS v THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA
VID 419 of 2008
RYAN J
1 APRIL 2009
MELBOURNE
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
VID 419 of 2008
ON APPEAL FROM THE ADMINISTRATIVE APPEALS TRIBUNAL
BETWEEN: SYMONE ANSTIS
ApplicantAND: THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA
RespondentJUDGE:
RYAN J
DATE OF ORDER:
1 APRIL 2009
WHERE MADE:
MELBOURNE
THE COURT ORDERS THAT:
1.The application by way of appeal be allowed.
2.The decision of the Administrative Appeals Tribunal of 18 April 2007 be set aside.
3.The amended assessment issued by the respondent on 17 November 2006 be set aside and be remitted to the respondent to be revised in accordance with the reasons of the Court published this day.
4.The respondent pay the applicant’s costs of the application, such costs to be taxed in default of agreement.
Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
The text of entered orders can be located using eSearch on the Court’s website.
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
VID 419 of 2008
ON APPEAL FROM THE ADMINISTRATIVE APPEALS TRIBUNAL
BETWEEN: SYMONE ANSTIS
ApplicantAND: THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA
Respondent
JUDGE:
RYAN J
DATE:
1 APRIL 2009
PLACE:
MELBOURNE
REASONS FOR JUDGMENT
By an amended notice of appeal filed in this Court on 21 July 2008, the applicant has appealed from a decision of the Administrative Appeals Tribunal (“the Tribunal”) constituted by Mr B H Pascoe, given on 18 April 2007. By its decision, the Tribunal had upheld a decision of the Commissioner of Taxation (“the Commissioner”) to disallow an objection against the disallowance as a deduction of $920 claimed as self-education expenses by the applicant in an amended income tax assessment for the year ended 30 June 2006 (“the tax year”).
Background
There was no dispute about the facts. During the tax year, the applicant was enrolled as a full-time student undertaking a teaching degree at the Australian Catholic University. In her tax return for the tax year, she acknowledged having received $14,946 as wages earned as a party-time sales assistant in the retail chain Katies, as well as the receipt of income from Youth Allowance in the sum of $3,622. The applicant did not declare the receipt of any income from having worked as a teacher.
It was common ground that the applicant was entitled to deduct from her income costs incurred in the course of her job as a sales assistant. The question in issue is whether she was also entitled, as a recipient of Youth Allowance, to deduct from her income the costs incurred in the course of her study.
In her tax return for the tax year, the applicant claimed a deduction of $920 for work-related self-education expenses, comprising;
‘Travel expenses other than to university $59.00
Supplies for children during teacher rounds $75.00
Student Administration Fee $80.00
Depreciation – computer $692.00
Textbooks and stationery $264.00
$1,170.00
Less reduction s 82A(1) $250
$920.00’
On 17 November 2006, the Commissioner issued an amended assessment for the tax year, increasing the applicant’s taxable income from $16,463 to $17,383 as a result of having disallowed the deduction of $920 for self-education expenses claimed in the applicant’s tax return for the tax year.
In a letter dated 27 November 2006, the applicant objected to the amended assessment on the basis that the claimed deduction ought to have been allowed. By notice of decision dated 5 December 2006, the Commissioner disallowed the applicant’s objection.
On 12 December 2006, the applicant made an application to the Tribunal to review the Commissioner’s decision, contending that she was entitled to the deduction as the expenditure had been incurred in gaining her assessable income of Youth Allowance. On 18 April 2007, the Tribunal gave written reasons affirming the decision under review. The applicant subsequently appealed to this Court.
Statutory Framework
Youth Allowance is a form of payment made by the Commonwealth through Centrelink, a government agency, under the Commonwealth’s education assistance scheme. In order to be eligible for, and continue to receive, Youth Allowance, a person must meet certain criteria which are set out in Part 2.11 Division 1 of the Social Security Act 1991 (Cth) (“the SSA”). The payment of Youth Allowance may be suspended at the direction of the Secretary in certain circumstances, including where the relevant criteria are no longer being met.
Section 540 of the SSA provides that, in addition to satisfying age and residency requirements;
‘a person is qualified for a youth allowance in respect of a period if…(a) throughout the period, the person satisfies the activity test. … …’
Section 541(1)(a) states that a person satisfies the activity test if he or she satisfies the Secretary that, throughout the period, the person is undertaking full-time study. The definition of “full-time study” is contained in s 541B(1), which requires that;
‘For the purposes of this Act, a person is undertaking full time study if:
(a)the person:
(i)is enrolled in a course of education at an educational institution; or
(ii)was enrolled in the course and satisfies the Secretary that he or she intends, and has (since no longer being enrolled) always intended, to re enrol in the course when re enrolments in the course are next accepted; or
(iii)was enrolled in the course and satisfies the Secretary that he or she intends, and has (since no longer being enrolled) always intended, to enrol in another course of education (at the same or a different educational institution) when enrolments in the other course are next accepted; and
(b)the person:
(i)is undertaking in the particular study period (such as, for example, a semester) for which he or she is enrolled for the course; or
(ii)intends to undertake in the next study period for which he or she intends to enrol for the course;
either:
(iii)in a case to which subsection (1A) does not apply—at least three quarters of the normal amount of full time study in respect of the course for that period (see subsections (2) to (4)); or
(iv)in a case to which subsection (1A) applies—at least two thirds of the normal amount of full time study in respect of the course for that period (see subsections (2) to (4)); and
(c)the course in question is an approved course of education or study (see subsection (5)); and
(d)in the Secretary’s opinion, the person is making satisfactory progress towards completing the course.’ [emphasis added]’
Subsection 41(1) of the Social Security (Administration) Act 1999 (Cth) relevantly provides that;
‘a social security payment becomes payable to a person on the person’s start day in relation to the social security payment.’
Youth Allowance is assessable income pursuant to s 6-5 of the Income Tax Assessment Act 1997 (Cth) (“the ITAA”). Section 11-5 of the ITAA provides that educational scholarships are generally treated as exempt income within the meaning of s 6-20. However, Youth Allowance, being a Commonwealth education payment made at regular and certain intervals in a specific sum, is not exempt by virtue of ss 51-10 and 51-35. In particular, s 51-35 provides that;
‘The following payments made to or on behalf of a full‑time student at a school, college or university are not exempt from income tax under item 2.1A of the table in section 51‑10:
… …
(b)a Commonwealth education or training payment …’
A deduction from this assessable income is allowable if the expenditure is incurred in deriving the assessable income in the form of Youth Allowance. Section 8-1 of the ITAA relevantly provides that;
‘(1)You can deduct from your assessable income any loss or outgoing to the extent that:
(a)it is incurred in gaining or producing your assessable income; or
(b)it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income.
(2)However, you cannot deduct a loss or outgoing under this section to the extent that:
(a)it is a loss or outgoing of capital, or of a capital nature; or
(b)it is a loss or outgoing of a private or domestic nature; or
(c)it is incurred in relation to gaining or producing your exempt income or your non-assessable non-exempt income; or
(d)a provision of this Act prevents you from deducting it.’
Subsection 82A(1) of the Income Tax Assessment Act 1936 (Cth) also provides;
‘Where a deduction is, or but for this section would be, allowable to the taxpayer under section 8-1 of the Income Tax Assessment Act 1997 in respect of a year of income in respect of expenses of self-education, the deduction, or the aggregate of the deductions, so allowable to the taxpayer in respect of those expenses shall not be greater than the amount by which the net amount of expenses of self-education exceeds $250.’
Decision of the Tribunal
Before the Tribunal, it was submitted on behalf of the applicant that she was required to be enrolled, and to be making satisfactory progress, in full-time study in order to be entitled to receive Youth Allowance, and that, therefore, the costs incurred in the course of her study were deductible as having been incurred in gaining that income. It was accepted on both sides that the teaching degree in which the applicant was enrolled at the Australian Catholic University was “a course of education at an educational institution” pursuant to s 541B(5) of the SSA.
For the Commissioner, it was submitted that the essential character of the expenditure was linked to the applicant’s course of study for the purpose of gaining future employment as a teacher, and lacked the necessary connection to the Youth Allowance income. According to the Commissioner, the expenditure had been incurred to enable the applicant to obtain new employment and was “at a point too soon” to be regarded as having been incurred in gaining or producing assessable income.
The Tribunal held, at [6] of its decision, that it is not sufficient that expenditure be incurred as a prerequisite of the derivation of income, citing as examples expenses incurred in travelling to work: see Lunney and Hayley v Commissioner of Taxation of the Commonwealth of Australia (1958) 100 CLR 478, and child care expenses: see Martin v Federal Commissioner of Taxation (1984) 2 FCR 260. According to the Tribunal, the expenditure must be “incidental and relevant to the derivation of the income”. The Tribunal held that self-education expenses are only deductible where they enable a taxpayer to improve or maintain professional skill or knowledge or would lead, or be likely to lead, to an increase in income from current income-earning activities, referring to cases such as Federal Commissioner of Taxation v Finn (1961) 106 CLR 60, Federal Commissioner of Taxation v Hatchett (1971) 125 CLR 494, Federal Commissioner of Taxation v Smith (1978) 36 FLR 95 and Federal Commissioner of Taxation v Lacelles-Smith (1978) 78 ATC 4162.
The Tribunal then observed, at [7], that income from Youth Allowance is an amount prescribed by social security legislation. That amount, the Tribunal held, could not be varied by incurring any expenditure. Rather, the same amount is payable to any student who qualifies irrespective of his or her course of study or the amount of expenditure incurred in relation to that study. The Tribunal concluded that the expenditure incurred in the course of the applicant’s study was akin to expenses of travel to work as “being necessary to put a taxpayer in a position to be able to receive income”. It held that it was “necessary to be enrolled in full-time study with its associated expenses in order to become entitled to Youth Allowance” and that, therefore, the derivation of that income was unrelated, and had no connection, to any expenditure incurred.
The Tribunal went on to state, at [8], that;
‘In considering the essential character of the expenditure it is clear that the primary purpose is to complete a university degree in order to qualify as a teacher and commence to earn income in that profession. The receipt of Youth Allowance may well allow or, at least, assist in completing that degree but the essential character of the expense such as that claimed, is that it is clearly incidental and relevant to putting [the applicant] into a position of qualifying as a teacher.’
Accordingly, the Tribunal affirmed the decision of the Commissioner.
The Applicant’s Submissions
At the hearing, the applicant was represented by her father, Mr Michael Anstis, who is a legal practitioner. Mr Anstis argued, in essence, that the applicant had expended money on her education in order to ensure that she continued to make satisfactory progress towards completing her teaching course and remained eligible to receive assessable income in the form of Youth Allowance. Therefore, it was submitted, the applicant was entitled to a tax deduction pursuant to s 8-1 of the ITAA.
The applicant submitted that the Tribunal’s decision had involved several errors of law. First, it was contended, the Tribunal had failed to apply the relevant test of “whether the expenditure is incidental and relevant to the derivation of income”. Mr Anstis referred to the decision of Hill J in Commissioner of Taxation v Cooper (1991) 29 FCR 177, where his Honour observed, at 198, that;
‘It will often, therefore, be necessary to analyse with some care what the operations or activities are that are regularly carried on by the taxpayer for the production of income and to determine whether the outgoings (or where relevant the losses) are incidental and relevant to those operations or activities.’
Similarly, in Ronpibon Tin NL and Tongkah Compound NL v Federal Commissioner of Taxation (1949) 78 CLR 47, the High Court held in relation to the predecessor to s 8-1 of the ITAA, s 51(1) of the Income Tax Assessment Act 1936 (Cth), at 57, that;
‘… to come within the initial part of the subsection it is both sufficient and necessary that the occasion of the outgoing should be found in whatever is productive of the assessable income.’
According to the applicant, pursuit by a recipient of Youth Allowance of a course of study is productive of the assessable income so that expenses incurred in the course of such study are allowable deductions.
It was further submitted on behalf of the applicant that the essential character of the expenditure must be examined in the light of the income derived because “such expenditure must be regarded as incidental and relevant to the derivation of income”. In Lunney (supra), Williams, Kitto and Taylor JJ held, at 499, that;
‘… to say that expenditure on fares is a prerequisite to the earning of a taxpayer’s income is not to say that such expenditure is incurred in or in the course of gaining or producing his income. Whether or not it should be so characterised depends upon considerations which are concerned more with the essential character of the expenditure itself than with the fact that unless it is incurred an employee or a person pursuing a professional practice will not even begin to engage in those activities from which their respective incomes are derived.’
Mr Anstis argued that the applicant’s expenditure in relation to her course of study was relevant and incidental to the derivation of Youth Allowance, and that the essential character of the self-education expenses demonstrated that they had been incurred in the course of gaining or producing her Youth Allowance. Mr Anstis drew a comparison with Reid v Commissioner of Inland Revenue (1983) 6 TRNZ 495, at 501, where Quilliam J, in the course of discussing the New Zealand student teacher allowance, observed that a payment of that allowance was “income derived from an allowance paid … in respect of his attendance at an educational institution.”
Secondly, the applicant referred to the Tribunal’s statement at [6] of its decision that “the principle has been established that self-education expenses are deductible where they enable a taxpayer to improve or maintain professional skill or knowledge or will lead, or likely lead, to an increase in income from current income-earning activities”. The applicant contended that the Tribunal had failed to consider that the cases relied upon had concerned claims for deductions from income derived from labour or employment, and were not relevant to the derivation by study of income in the form of Youth Allowance. The applicant submitted at [11(a)] of her written submissions that “the true principle from these cases is that where a person derives income through labour or employment a deduction for study is allowable if the study is intended to increase or maintain income from that particular labour or employment. The cases have no relevance where income is not derived through labour or employment but is derived from study.”
Thirdly, the applicant contended that the Tribunal had erred in taking into consideration the fact that “the income from Youth Allowance cannot be increased or altered by incurring any expenditure”. The applicant submitted that this was not relevant in determining whether the applicant’s self-education expenses were incidental and relevant to the derivation of her Youth Allowance income.
In Morris v Federal Commissioner [2002] FCA 616, a physical education teacher was permitted to claim as a deduction the cost of sunscreen, hats and sunglasses, even though her primary motive in using the sunscreen was not to continue earning income from her employment but to prevent skin cancer. The Court, in allowing the deduction, held that the expenditure was “brought about by the conditions of her employment as a teacher, which requires her to work in an environment which exposes her to harmful rays of the sun”. However, Mr Anstis noted, no argument was made that the benefit of sunscreen had increased the teacher’s income. He pointed out that, in some cases, the expenditure may not result in the derivation of any income but is still deductible.
Fourthly, the applicant argued that the Tribunal had erred in making a comparison between expenditures incurred in the course of study and expenses of travel to work as being necessary to put a taxpayer in a position to be able to receive income. Mr Anstis contended that “travelling to work does not by itself entitle you to income. In the case of Youth Allowance, study (assuming other criteria are met) does.”
Mr Anstis sought to distinguish this case from Lodge v Federal Commissioner of Taxation (1972) 128 CLR 171, in which the appellant had worked from home as a stenographer, preparing bills of costs for firms of solicitors. Finding herself incapable, whilst her child was at home, of performing the work from which her assessable income was derived, she placed her child in day care and subsequently sought to claim the costs of child care as an allowable deduction under the s 51(1) of the Income Tax Assessment Act 1936 (Cth). Justice Mason stated, at 175-176 of his reasons for judgment, that;
‘The expenditure was incurred for the purpose of earning assessable income and it was an essential prerequisite of the derivation of that income. Nevertheless its character as nursery fees for the appellant’s child was neither relevant nor incidental to the preparation of bills of cost, the activities or operations by which the appellant gained or produced assessable income. The expenditure was not incurred in, or in the course of, preparing bills of cost.’
According to the applicant, Lodge is distinguishable because “a person does not earn income by having their child looked after but in the case of Youth Allowance a person does earn income through study.” Furthermore, it was submitted, this was not a case in which the applicant was able to choose the manner and form in which she performed the activity from which her income was derived.
Mr Anstis submitted that the Tribunal had also erred in differentiating between entitlement to Youth Allowance and derivation of Youth Allowance, and by refusing to acknowledge the connection between the derivation of income in the form of Youth Allowance income and the expenditure incurred. He cited Inguanti v Secretary, Department of Social Security (1988) 80 ALR 307 at 311, where Sheppard J, in discussing whether an Italian pension that had not yet been paid to the individual had been derived for social security purposes, said of interest to which pensioners became entitled on Australian Savings Bonds that “the moneys to which they are periodically entitled are moneys derived by them.” Mr Anstis concluded that “being entitled to Youth Allowance [is] all that is required to derive or earn Youth Allowance. There are no separate steps akin to travelling to work and then commencing work.” Likewise, he pointed to Reid v Commissioner of Inland Revenue (supra), where the Court held, at 501, that “once these requirements have been met and the student is accepted then he becomes entitled to an allowance”.
Finally, the applicant disputed the relevance of the Tribunal’s finding at [8] of its decision that;
‘In considering the essential character of the expenditure it is clear that the primary purpose is to complete a university degree in order to qualify as a teacher and commence to earn income in that profession.’
Mr Anstis submitted that the applicant’s primary purpose in deriving Youth Allowance was to enable her to become a teacher but her primary motive in making satisfactory progress in her course of study was to continue to receive Youth Allowance, which, in turn, was necessary in order to complete her studies. He argued that there is no rule to the effect that present income-earning activities directed towards a future income as well as a present income disentitle an individual from claiming amounts properly deductible from his or her current income. The applicant also pointed out that the Tribunal had failed to explain why this “rule” had not been applied to the expenditure referable to the applicant’s job as a sales assistant, which could also be said to have been undertaken for the primary purpose of qualifying to be a teacher.
The applicant referred to Handley v Federal Commissioner of Taxation (1981) 148 CLR 182, where Stephen J observed at 189-190 that;
‘Whether or not on each occasion the loss or outgoing is sufficiently incidental or relevant will depend upon a variety of factors. In some circumstances the purpose for which the advantage occasioning the loss or outgoing is sought may evidence a sufficient relationship with the income-earning process. … On other occasions, the purpose may be of little assistance …’
In John v Federal Commissioner of Taxation (1989) 166 CLR 417, the High Court stated at 427 that consideration of the purpose for which the expenditure was outlaid might not be wholly irrelevant where no income has been gained or produced but that “the cost of a step taken in the process of gaining or producing income must be regarded as an outgoing … whatever purpose or motive may have attended all or any of the steps involved.”
Mr Anstis observed that this “primary purpose test” had not been applied in other cases where a deduction had been allowed: see eg Morris (supra). It was submitted that the applicant’s motive in receiving Youth Allowance was irrelevant as it was not a condition of payment that she be actuated by the purpose of acquiring a qualification which could be used in remunerative employment. The applicant noted that it was possible for a person to incur expenses in connection with a course for which he or she receives Youth Allowance despite having no intention of using the qualifications for the future derivation of income.
For these reasons, the applicant submitted that the appeal should be allowed.
The Commissioner’s Submissions
Mr Philip Ginnane of Counsel, for the Commissioner, submitted that the applicant was not entitled under s 8-1 of the ITAA to a deduction from assessable income which she received as from Youth Allowance. He contended that the Tribunal had correctly identified and applied the relevant test to the derivation of the applicant’s income by way of Youth Allowance. According to the Commissioner, in order for the applicant to be entitled to deduct from her assessable income any loss or outgoing, including self-education expenses, the outgoings must have been incurred in the course of gaining or producing assessable income. At [27]-[28] of the Commissioner’s submissions, it was argued that;
‘27. … There must be sufficient connection between the loss or outgoing and the activities by which the taxpayer’s assessable income is gained so that the outgoing is incidental and relevant to the gaining of the assessable income.
28. Furthermore, it must have the essential character of a loss [or] outgoing incurred in gaining the taxpayer’s assessable income or in other words, it must be an income producing expense.’
Counsel for the Commissioner cited Federal Commissioner of Taxation v Payne (2001) 202 CLR 93, in which Gleeson CJ, Kirby and Hayne JJ held, at 99 [9] that;
‘It has long been established that “incurred in gaining or producing” is to be understood as meaning incurred “in the course of” gaining or producing. [Citations omitted] What is meant by being incurred “in the course of” gaining or producing income was amplified in Ronbipon Tin NL v and Tongkah Compound NL v Federal Commissioner of Taxation (1949) 78 CLR 47 where it was said that:
… to come within the initial part of [s 51(1)] 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.’
At 102 [16], their Honours continued;
‘The principle which had to be applied in that case, and must be applied in this, is one which limits the allowance of a deduction for outgoings to those outgoings that are incurred in the course of deriving assessable income. It is a principle which excludes outgoings which, although incurred for the purpose of deriving assessable income, are not incurred in the course of doing so. Distinguishing between those two kinds of outgoing may well invite some criticism, but if it does, the criticism is directed at the legislation, not at the way the legislation has been interpreted.’
The Commissioner then cited Fletcher v Federal Commissioner of Taxation (1991) 173 CLR 1 at 17, where the High Court expressed the requirement in the following terms;
‘The question whether an outgoing was, for the purposes of s 51(1), wholly or partly incurred “in gaining or producing the assessable income” is a question of characterization. The relationship between the outgoing and the assessable income must be such as to impart to the outgoing the character of an outgoing of the relevant kind. It has been pointed out on many occasions in the cases that an outgoing will not properly be characterised as having been incurred in gaining or producing assessable income unless it was “incidental and relevant to that end”.’
The Commissioner acknowledged that, in order to meet her educational requirements, the applicant had incurred certain expenses, which “may be regarded as incidental, ancillary or even necessary for her study”. However, the Commissioner sought to refute the applicant’s contention that such expenses were incidental or necessary to her gaining Youth Allowance, arguing at [34]-[35] of his submissions that;
‘The gaining of, or the receipt of such income benefit, is independently determined by the applicant’s enrolment in a course of qualifying full time study and by her satisfying and maintaining the eligibility requirements for the receipt of Youth Allowance. The assessable income is not produced by the applicant’s study …
… … absent the expenses claimed, the applicant was not precluded from being a full-time student enrolled in an approved course and consequently qualified and eligible to receive Commonwealth assistance by way of Youth Allowance. The applicant’s outgoings were not a cost or a step in gaining or producing her income. The expenses may have been a necessary pre-requisite to the applicant undertaking her study but they are not relevant and incidental to her gaining Youth Allowance in a similar way that incurring travelling expenses in getting to and from work are not relevant and incidental to earning assessable income from employment. The expenses were costs incurred as to the manner and form in which the applicant went about conducting herself as a student but they were not costs that were incidental and relevant to her gaining Youth Allowance.’
Counsel for the Commissioner drew comparisons with Cooper (supra), which concerned a professional rugby league player whose coach had instructed him to consume specified quantities of food and drink each week during the off season, in addition to his normal meals, in order to retain his optimal playing weight. He later sought to claim the cost of a tax deduction for the special meals. At 184-185 of his reasons, Lockhart J observed that the taxpayer was paid to train for and play football, and not to consume food and drink, although in appropriate circumstances food expenses could be claimed as a deduction. For example, “a person whose business is the publication of a food guide may buy and taste food in the course of his business, so there is a clear nexus between the expenditure and the derivation of income.”
According to the Commissioner, the Commonwealth had paid the applicant Youth Allowance because she was a student; however she was not paid for studying per se. The Commissioner contended that the essential character of the applicant’s expenses lay in their having been incurred in undertaking her studies so as to enable her to complete her course of study and obtain subsequent employment as a teacher, and that, therefore, the expenses were relevant to or incidental to the applicant’s course of study and not to the gaining or producing of Youth Allowance income. At [37], the Commissioner submitted further that;
‘Self-education expenses claimed as deductions by the applicant including travelling to her place of study, student supplies for teaching rounds and the purchase of textbooks when viewed objectively are expenses incurred to undertake the course of study. Their essential character is linked to study and not to the assistance that may be derived in the form of Youth Allowance as an incident of that study, presuming that the various eligibility and qualifying requirements are otherwise satisfied. Thus the respondent submits they lack the “essential character” of income producing expenses.’
The Commissioner then cited Taxation Ruling TR 98/9, in which it was ruled that expenses incurred in fulfilling course requirements are correctly characterised as expenses incurred in undertaking study that might enable the student to obtain employment in a particular field. The applicant’s expenses, it was contended, were not incidental and relevant to the Youth Allowance payments. On the Commissioner’s analysis, the object of the expenditure was to gain a qualification and the outlays claimed by the applicant take their essential character from this purpose, irrespective of whether the applicant might not have been entitled to receive future Youth Allowance if the expenses had not been incurred.
The Commissioner went on to refer to Case N94 (1981) 81 ATC 507, in which an unemployed applicant had claimed a tax deduction for expenses incurred in complying with obligations to look for work so as to remain in receipt of Commonwealth unemployment benefits and assistance. In determining that such expenses were not deductible from assessable income for the purposes of the ITAA, Member Pape observed, at 512, that;
‘He received the benefit because he was unemployed, not because he spent money in searching for employment, albeit that the continuation of benefits may have been withdrawn if he did not satisfy the Director-General of Social Security of the matters prescribed in para. (c) sec. 107(1) of the Social Services Act 1947. Thus I am of the opinion that the expenditure incurred by the taxpayer in seeking employment was not an outgoing incurred in gaining the unemployment benefit. Moreover, I am of the opinion that the expenditure was incurred at a point too soon to be properly regarded as gaining or producing the taxpayer’s future assessable income.’
In response to the applicant’s assertion that the Tribunal had erred in law in deciding that self-education expenses will only have the essential character of an income-producing expense when they may be seen to increase the income earned in existing employment, the Commissioner submitted that the Tribunal had not applied a “blanket rule”. Instead, argued the Commissioner, the Tribunal had held, in accordance with established authority, that self-education expenses have the necessary or essential character of an income-producing expense or outgoing if the expenditure is incidental and relevant to the derivation of the income.
The Commissioner also disputed, as based on flawed reasoning, the applicant’s contention that because “all cases referred to are concerned with claiming a deduction from income derived from labour or employment” they were not relevant to her situation because her income was derived from study. The Commissioner claimed, at [41] of his written submissions, that;
‘The principle that finds its expression in the authorities referred to by the Tribunal where self-education expenses have been deductible against income presumes that the expenses on self-education could effect, or likely effect, an increase in the income earning capacity of the taxpayer or improve or maintain the taxpayer’s skill and knowledge. These cases are examples of the application of the principles of deductibility of outgoings under section 8-1 of the ITAA.’
Finally, the Commissioner submitted that the applicant’s self-education expenses would fail the test in any event because they were incurred at a “point too soon”. The Commissioner asserted that the claimed expenses were not outgoings incurred in gaining the applicant’s income. Rather, the Commissioner contended, the conferral of a degree or qualification as a result of her study might lead to the applicant’s obtaining work that in turn would produce income; see Federal Commissioner of Taxation v Maddalena (1971) 2 ATR 541, at 549-550. That case concerned a tradesman who was also a rugby league footballer. He incurred costs travelling to negotiations with various rugby league clubs and later claimed the amount of those costs as an allowable deduction from his income. The High Court held that the costs had not been incurred in gaining assessable income because they had been outlaid to secure income in the future.
The Commissioner submitted that an analogy could be drawn in the present case. At [43] of his written submissions, the Commissioner contended that;
‘The applicant’s costs of putting herself in a position to earn income from a particular profession (teaching) are not costs by way of expenses incurred in the course of gaining or producing such assessable income. When it was accepted, as it was by the Tribunal, that the cost of studies attendant on the receipt of Youth Allowance were not outgoings incidental and relevant to earning the grant of that assistance, the Tribunal then found that the outgoings of self-education expenses were incurred at a point too soon to be said to have been incurred in gaining or producing the income of a teacher.’
Accordingly, it was submitted that for either of the two reasons advanced on behalf of the Commissioner, the applicant was not entitled to deduct her costs of study as having been incurred in gaining Youth Allowance.
Disposition of the Appeal
The characterisation of expenditure for the purpose of s 8-1 of the ITAA frequently turns on a subtle analysis of the connection between the incurring of the expenditure and the derivation of assessable income. The present is just such a case. There is no suggestion that the applicant incurred the claimed outgoings in carrying on a business for the purpose of gaining or producing assessable income. Her claim for a deduction is therefore confined to the first limb of s 8-1(1) which makes deductible a loss or outgoing to the extent that;
‘(a) it is incurred in gaining or producing your assessable income.’
It is sufficient if the claimed expenditure is incurred “in the course of” gaining or producing the taxpayer’s assessable income; see Ronpibon Tin NL v Federal Commissioner of Taxation (supra), at 56. In the same case, it was held, at 57, that “the occasion of the outgoing should be found in whatever is productive of the assessable income.” In the present case, what was productive of assessable income was the applicant’s having qualified for the receipt of Youth Allowance and having preserved that qualification throughout the relevant period by satisfying the activity test. The satisfaction of that test, in turn, required her to be enrolled in a course of education at an educational institution, to be undertaking at least three-quarters of the normal amount of full-time study in respect of the relevant course for the period in question and to enable the Secretary to form the opinion that she was making satisfactory progress towards completing the course.
In these circumstances, in my opinion, the occasion of any expenditure such as that on enrolment fees or prescribed text books which was necessary to satisfy one or other of the three requirements identified at [54] of these reasons was to be found in the applicant’s receipt of assessable income in the form of Youth Allowance. The expenditure was of a different character from that examined in Lunney v Commissioner of Taxation (supra). In that case, fares paid by taxpayers in travelling from their homes to their places of employment or business and back again were held not to be allowable against the assessable income earned in the employment or business. In their joint judgment, Williams, Kitto and Taylor JJ observed, at 498;
‘The question whether the fares which were paid by the appellants are deductible under s 51 should not and, indeed, cannot be solved simply by a process of reasoning which asserts that because expenditure on fares from a taxpayer's residence to his place of employment or place of business is necessary if assessable income is to be derived, such expenditure must be regarded as "incidental and relevant" to the derivation of such income. No doubt both of the propositions involved in this contention may, in a limited sense, be conceded but it by no means follows that, in the words of the section, such expenditure is "incurred in gaining or producing the assessable income" or "necessarily incurred in carrying on a business for the purpose of gaining or producing such income". It is, of course, beyond question that unless an employee attends at his place of employment he will not derive assessable income and, in one sense, he makes the journey to his place of employment in order that he may earn his income. But to say that expenditure on fares is a prerequisite to the earning of a taxpayer's income is not to say that such expenditure is incurred in or in the course of gaining or producing his income. Whether or not it should be so characterised depends upon considerations which are concerned more with the essential character of the expenditure itself than with the fact that unless it is incurred an employee or a person pursuing a professional practice will not even begin to engage in those activities from which their respective incomes are derived.’
There Honours also derived support, as did Dixon CJ at 485, from the reasoning of Denning LJ in Newsom v Robertson [1953] Ch 7, where his Lordship concluded, at 16;
‘A distinction must be drawn between living expenses and business expenses. In order to decide into which category to put the cost of travelling, you must look to see what is the base from which the trade, profession, or occupation is carried on. In the case of a tradesman, the base of his trading operation is his shop. In the case of a barrister, it is his chambers. Once he gets to his chambers the cost of travelling to the various courts is incurred wholly and exclusively for the purposes of his profession. But it is different with the cost of travelling from his home to his chambers and back. That is incurred because he lives at a distance from his base. It is incurred for the purposes of his living there and not for the purposes of his profession, or at any rate not wholly or exclusively; and this is so, whether he has a choice in the matter or not. It is a living expense as distinct from a business expense.’
In my view, the same distinction can be drawn between fares incurred by recipients of the Youth Allowance, even those undertaking the same course of study, in travelling to and from the educational institution and expenses necessarily incurred in the course of undertaking a course of study at that institution. If the latter expenses include the cost of travelling from the institution to a school or other place where a teaching round is to be undertaken and back, they are analogous to the expenses incurred, in the example given in Newsom v Robertson, by a barrister in travelling from chambers to various courts and returning to chambers.
Nor are educational expenses incurred in satisfying the requirements for receipt of Youth Allowance akin to the child care expenses examined by a Full Court of this Court in Martin v Federal Commissioner of Taxation (supra). In that case, the Full Court, following Mason J in Lodge (supra), held that child-minding fees had been expended in order to free the taxpayer to take on the work in question. In the present case, the payment of the subject fees and expenses did not free the applicant to do anything; they were visited indiscriminately on her and all other students undertaking the same course who wished to make satisfactory progress towards completing it.
Although the deductions in question in this case were claimed in the applicant’s tax return as “self-education expenses”, they are not to be characterised in the same way as similarly described expenses discussed in Federal Commissioner of Taxation v Finn (supra) and Federal Commissioner of Taxation v Hatchett (supra). In Finn, an architect employed by the Western Australian Department of Public Works incurred expenses in travelling overseas during a period of accumulated leave which he devoted to a study of new developments in architecture. It was held that those expenses were deductible because they had been incurred in gaining or producing assessable income as a result of a hoped-for promotion. It was not to the point, the Court held, that the assessable income would have been derived in the future and not in the tax year in which the expenditure had been incurred. In the present case, the applicant was not employed as a teacher, or in any other relevant capacity, when the expenses were incurred. At best, she had a prospect of obtaining employment as a teacher but that was not a condition of her receipt, in the relevant tax year, of Youth Allowance. In that sense, her expenditure on self-education was more properly to be regarded as directed to the acquisition of an enduring qualification in the nature of capital, a characteristic which was rejected by Dixon CJ in Finn, at 69, because of the existing status as a professional man of the taxpayer in that case. In Hatchett, Menzies J applied Finn in allowing a deduction of fees incurred by a teacher in submitting theses to qualify for a Teacher’s Higher Certificate. Those expenses were held to have a sufficient connection with derivation of income as a teacher to justify allowing them as a deduction. On the other hand, moneys expended as university fees on subjects in the faculty of arts were disallowed by Menzies J who observed, at 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 connexion 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 connexion between the outgoing and assessable income. Had the taxpayer 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 connexion with the taxpayer's assessable income as the fees in fact paid. In the conclusion that the university fees paid are not deductible, I believe that I am supported by Federal Commissioner of Taxation v. Finn … .’
In Federal Commissioner of Taxation v Smith (supra), Waddell J applied Finn and Hatchett in allowing claims by a tax assessor for fees, the cost of text books and other expenses incurred in pursuing a commerce degree. His Honour found a real connection between the incurring of those expenses and the taxpayer’s assessable income because the accession of the additional qualifications had led to an increase in income and could reasonably be expected to do so in the future. Similar reasoning enabled the same learned judge in Federal Commissioner of Taxation v Lacelles-Smith (supra) to allow self-education claims by another assessor in the Australian Tax Office, notwithstanding that the taxpayer had subsequently discontinued his course leading to a Diploma in Commerce. His Honour observed, at 4,163;
‘In the present case the taxpayer's successful commencement of the Commerce Diploma Course led to his being selected for an Assessing School and to his promotion to the position of Assessor, Grade 1 with an increase in salary. This was a reasonably certain consequence of his commencement of the course and the expenditure thereby incurred was clearly, in my opinion, incurred in gaining the assessable income. Thereafter, his continuance of the course must be regarded as likely in all probability to have led to promotion as an assessor with consequent increases in salary provided he was successful in the course and performed his departmental duties satisfactorily. In fact, he was promoted to Acting Assessor Grade 3 with an increase in salary in the year of income in question and during the 1975 tax year was promoted, again with an increase in salary. For present purposes it is irrelevant that he has now discontinued the course. When he commenced it it was reasonable to suppose that his pursuit of the course would lead to the promotions and increases in salary which he has gained. It was part of the circumstances of his employment that it was necessary for him to spend the money on pursuing the course which he did in order to earn greater income in the future.’
As I have already pointed out, the applicant in this case had no present employment to provide the requisite connection between the claimed employment and the derivation of income. However, I do not regard as significant the matter which, as outlined at [18] above, weighed with the Tribunal in the present case. That was that the same amount was payable as Youth Allowance to any student irrespective of his or her course of study or the expenditure necessarily incurred in pursuing it. The fact that a number of employees received the same income from similar employment does not disentitle them from claiming deductions for expenses, even of different amounts, necessarily incurred in undertaking that employment. The outlay of fees to enrol in a course to qualify for Youth Allowance and incurring other expenses to satisfy the activity test and so preserve the qualification is not akin to the payment of travelling expenses discussed in cases like Lunney. The claimed expenses in this case were not outlaid to put the applicant in a position to receive Youth Allowance. Rather, they were incurred as a necessary incident of pursuing a particular course of study and, unlike the cost of travelling between their homes and the educational institution, would have been paid in the same amount by all recipients of Youth Allowance who were pursuing the same course.
The Commissioner’s contention reproduced at [45] above that the essential character of the expenses claimed by the applicant “is linked to study and not to the assistance that may be derived in the form of Youth Allowance as an incident of that study, presuming that the various eligibility and qualifying requirements are otherwise satisfied”, must be rejected. That is because the presumption which the Commissioner invokes is not available. The various eligibility and qualifying requirements for Youth Allowance cannot be satisfied otherwise than by enrolling in an educational institution, undertaking the course for the necessary proportion of the normal amount of full-time study, and, in the Secretary’s opinion, making satisfactory progress towards completing the course. If those requirements can, as the evidence in this case demonstrates, only be satisfied by the expenditure of money, then that expenditure is incurred in gaining or producing the Youth Allowance within the meaning of s 8-1 of the ITAA. That the taxpayer’s ultimate purpose or motive in undertaking the course was to acquire a qualification leading to future employment as a teacher is irrelevant to the characterisation of the expenditure. It is sufficient that the expenditure was incurred as a necessary incident of deriving the Youth Allowance.
Although almost all of the authorities on deductibility of educational expenses have involved an examination of the relationship between those expenses and the receipt of income from employment in the future, that relationship is not exhaustive of the ways in which fees paid to an educational institution or the cost of text books or other related expenses may be incurred in gaining or producing assessable income as required by s 8-1. The derivation of income in the form of Youth Allowance exemplifies one of the alternative ways in which the occasion of the outgoing is to be found in what is productive of the assessable income; see Ronpibon Tin (supra), at 57.
Moreover, because the expenditure by the applicant was in the same tax year as or otherwise close in time to, the receipt of the Youth Allowance, it cannot be said to have been incurred at “a point too soon” in the sense suggested in Federal Commissioner of Taxation v Maddalena (supra), at 549 and Case N94 examined at [47] above.
Conclusion
For the reasons which I have endeavoured to explain, the expenses claimed by the applicant were deductible in accordance with s 8-1 of the ITAA. It follows that the application by way of appeal must be allowed and the decision of the Tribunal of 18 April 2007 be set aside. The amended assessment issued on 17 November 2006 should be set aside and remitted to the Commissioner to be revised in accordance with these reasons. The Commissioner must pay the applicant’s costs of the application.
I certify that the preceding sixty-five (65) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Ryan. Associate:
Dated: 1 April 2009
Counsel for the Applicant: Mr M Anstis Solicitor for the Applicant: Michael Anstis Counsel for the Respondent: Mr P J Ginnane Solicitor for the Respondent: Legal Services Branch, Australian Tax Office
Date of Hearing: 28 October 2008 Date of Judgment: 1 April 2009
11
0