Cheung and Commissioner of Taxation

[2008] AATA 220

. 

Administrative Appeals Tribunal

DECISION AND REASONS FOR DECISION [2008] AATA 220

ADMINISTRATIVE APPEALS TRIBUNAL      )

)          No 2007/4577

TAXATION APPEALS DIVISION		)
Re		YIN FONG CHEUNG

Applicant

And COMMISSIONER OF TAXATION

Respondent

DECISION

Tribunal Mr S E Frost, Member

Date19 March 2008

PlaceSydney

Decision The decision under review is affirmed.

..................[sgd]............................

Mr S E Frost
  Member

CATCHWORDS

TAXATION – income tax – deductions – self-education expenses – whether expenditure incidental and relevant to income-producing activities – whether expenditure has the essential character of an income-producing expense – consideration of Taxation Ruling TR98/9 – principles set out in TR98/9 are subject to the “incidental and relevant” and “essential character” considerations – decision under review affirmed

Income Tax Assessment Act 1997 – section 8-1

Taxation Ruling TR 98/9 Income Tax: deductibility of self-education expenses

Ronpibon Tin NL v Federal Commissioner of Taxation (1949) 78 CLR 47

Lunney v Commissioner of Taxation (1958) 100 CLR 478

Commissioner of Taxation v Cooper (1991) 29 FCR 177

Commissioner of Taxation v Hatchett (1971) 125 CLR 494

Commissioner of Taxation v Studdert (1991) 33 FCR 75

Commissioner of Taxation v Roberts (1992) 39 FCR 118

Commissioner of Taxation v Maddalena (1971) 45 ALJR 426

Federal Commissioner of Taxation v Kropp (1977) 28 FLR 375

Commissioner of Taxation v Klan (1985) 80 FLR 320

Re Tobias and Federal Commissioner of Taxation (1998) 38 ATR 1169

REASONS FOR DECISION

19 March 2008 Mr S E Frost, Member        

Introduction

1.      Expenses of self-education are deductible for taxation purposes only if they fall within the general deductions provision in section 8-1 of the Income Tax Assessment Act 1997 (“the Act”).  That means that, if you are an employee, the expenses must be “incurred in gaining or producing your assessable income”.

2.      Yin Fong Cheung (“the taxpayer”) was undertaking a course of study in hospitality and tourism management at the Blue Mountains Hotel School.  One of the requirements of the course was that she carry out work experience in a hospitality environment.  She did this.  She then claimed as a deduction the course fees that she paid.  The Commissioner disallowed the deduction and also disallowed the taxpayer’s objection against the amended assessment that arose from that.  The taxpayer has applied for a review of the Commissioner’s objection decision.

The issue

3.      The only issue for my determination is whether, in the 2005/06 income year, the taxpayer incurred self-education expenses “in gaining or producing [her] assessable income” for the purposes of section 8-1 of the Act.

The taxpayer’s factual circumstances

4.      The taxpayer is evidently passionate about the hospitality industry. 

5.      In January 2004 she enrolled as a full-time student in the Diploma of Hospitality Management at the Blue Mountains Hotel School.  That is a two-year, or four-semester, course.  The second and fourth semesters (in the taxpayer’s case, these represent, respectively, the second half of calendar year 2004 and the second half of calendar year 2005) consist of an “industry placement” in which students work in hotels or other hospitality environments.  She undertook those industry placements – the first at the Sydney Boulevard Hotel and the second at the Four Seasons Hotel in Sydney.  She satisfactorily completed the diploma course in December 2005, and was presumably awarded the diploma.

6.      During her first industry placement, at the Sydney Boulevard Hotel, the taxpayer worked in the food and beverage area.  In her second placement, at the Four Seasons, she worked in the “room division”, as a room attendant, where her duties seem to have comprised general housekeeping – making up rooms for guests, cleaning, replacing linen and towels and the like.

7.      At the same time that she was undertaking the second industry placement, she also worked on a casual basis at the Boulevard.  Presumably, she had made an impression there the previous year and was able to secure some extra work while she was undertaking her formal placement at the Four Seasons.  While at the Boulevard, again working in the food and beverage area, she sometimes acted, although not officially, as the food and beverage team leader.  Her acting in this position came about as a result of the temporary unavailability of the normal team leader.  Her team leader responsibilities included what she described as “guiding colleagues how to do the job” and training new employees.

8.      The period during which she undertook the formal placement at the Four Seasons was 27 June 2005 to 29 January 2006, and the period of casual employment at the Boulevard roughly coincided with that period.

9.      On 13 February 2006 she enrolled in a Bachelor of Commerce (Hospitality and Tourism Management) program, again at the Blue Mountains Hotel School.  Because she had successfully completed the diploma course, she needed to complete a further two semesters, both of them consisting of full-time formal study on site at the school.  She could not continue to work at either of the Sydney hotels where she had undertaken her placements because the travel time between Sydney and the Blue Mountains, at around two hours each way, made this impossible.  She therefore terminated her employment at both hotels and devoted 2006 to her full-time study.  In broad summary, then, the first half of the financial year was spent working at the two hotels in Sydney, and the second half was spent in full-time study at the Blue Mountains Hotel School.

10.     After she finished her study in December 2006, she commenced working at the Shangri-La Hotel in Sydney.  She explained that she would have been happy to recommence employment at the Boulevard, but she could not do that because that hotel did not have any budget to sponsor foreign employees, such as herself.  She believed that if it did have such a budget, then she would have recommenced working at the Boulevard as a food and beverage team leader.  Nevertheless, this did not happen.  The Shangri-La was able to offer her employment, and indeed, she commenced there in early 2007 as a food and beverage supervisor, which she said was the equivalent of a team leader.

11.     In her income tax return for the 2005/2006 year, the taxpayer declared the income that she earned from the Boulevard and Four Seasons hotels, and claimed a deduction of $29,022 in relation to her self-education expenses.  An original assessment issued showing no tax payable, but the Commissioner soon notified the taxpayer that he wished to audit the self-education claim.  Following the audit, and not satisfied that the claimed deduction was allowable, the Commissioner issued an amended assessment.

12.     The Commissioner’s notification that the audit had been completed was accompanied by an explanation of the reasons for issuing the amended assessment.  That explanation included references to the Commissioner’s Taxation Ruling TR98/9 dealing with the deductibility of self-education expenses.  Considering her circumstances to be within the principles set out in that ruling, the taxpayer objected against the amended assessment.  The main grounds of objection, reflecting statements in TR98/9, were that:

·     there was a real and direct connection between her employment and study;

·     her study enabled her to maintain or improve the skill or knowledge necessary for her income-earning activities;

·     her study was likely to lead to a future increase in the income from her current income-earning activities.

13.     The Commissioner disallowed the objection in full.

The legal principles involved

14.     Subsection 8-1(1) of the Act says that 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)  …”.

15. There are countless cases dealing with the meaning of this provision and its forerunner, the first limb of subsection 51(1) of the Income Tax Assessment Act 1936 (“the 1936 Act”).  For current purposes, it is sufficient to note the following two principles that have been identified by the High Court:

(i)The outgoing must be “incidental and relevant” to the gaining or producing of assessable income: Ronpibon Tin NL v Federal Commissioner of Taxation (1949) 78 CLR 47 at 56;

(ii)The expenditure must have the essential character of an outgoing incurred in gaining assessable income or, in other words, of an income-producing expense: Lunney v Commissioner of Taxation (1958) 100 CLR 478 at 497-498.

16.     Statements of apparent principle in TR98/9, to the effect that self-education expenses are deductible if:

(a)  “they have a relevant connection to the taxpayer's current income-earning activities” (paragraph 12); or

(b)  the taxpayer's income-earning activities “are based on the exercise of a skill or some specific knowledge and the subject of self-education enables the taxpayer to maintain or improve that skill or knowledge” (paragraph 13); or

(c)  “the study of a subject of self-education objectively leads to, or is likely to lead to, an increase in a taxpayer's income from his or her current income-earning activities in the future” (paragraph 14),

must be understood as attempts by the Commissioner to provide some practical explanation of the meaning of the law.  However, as is emphasised in TR98/9 itself – particularly at paragraphs 16 and 17 – those statements are all subject to the general principles, as set out in paragraph 15 of these reasons.

17.     None of the cases dealing with self-education expenses have strayed from those principles, although in some of them, the courts have used slightly different language.  For example, in Commissioner of Taxation v Cooper (1991) 29 FCR 177, Hill J said at 197 that “[w]hat is important is that the concept enshrined in the first limb of [subsection 51(1)] is one of the deductibility of working expenses”. It is difficult to imagine a category of “working expenses” that would neither be “incidental and relevant” to the gaining of assessable income, nor have the “essential character” of an income-producing expense.

18.     In Commissioner of Taxation v Hatchett (1971) 125 CLR 494, Menzies J, although noting that “[t]he taxpayer, in reliance upon the conditions of his employment, spent money to earn more” (at 498), actually based his decision on the “relevance” of the particular study undertaken by the taxpayer – see Hill J’s analysis of Hatchett in Commissioner of Taxation v Studdert (1991) 33 FCR 75, especially at 82-83.

19.     In Studdert itself, the taxpayer, a flight engineer employed by Qantas Airways Ltd, was allowed a deduction for flying lessons.  Hill J considered that the expenditure was “relevant and incidental to the [taxpayer's] activities as [a] flight engineer”.

20.     As was emphasised by Cooper J in Commissioner of Taxation v Roberts (1992) 39 FCR 118, at 125, in all of the self-education cases he considered, the taxpayer remained at all times – including before, at, and after the time the outgoing was incurred – in the employ of the same employer. This is not surprising, since it is difficult to sustain an argument that expenditure is “incidental and relevant” to the gaining of assessable income, or that the expenditure has the “essential character” of an income-producing expense, when there is no continuing employment relationship at the time when the expenditure is incurred. Instead, the expenditure has the appearance of an outgoing that is directed towards the getting, rather than the doing, of work as an employee: see for example Commissioner of Taxation v Maddalena (1971) 45 ALJR 426.

21.     The only relevant case where employment was either terminated or interrupted is Federal Commissioner of Taxation v Kropp (1977) 28 FLR 375 – but Cooper J says in Roberts, also at 125, that this decision “appears, on a superficial reading at least, to be anomalous”.

22.     In Kropp, the taxpayer was a chartered accountant employed by Price Waterhouse and Co.  With the encouragement of his employers, he resigned his employment and flew overseas, at his own expense, to take up employment with an affiliated firm in Canada.  Some two years later, he returned to Australia and was re-employed at a more senior level by the Australian firm.  In allowing the deduction, Waddell J in the Supreme Court of New South Wales said at 383:

… The expenditure was part of a plan pursued by the taxpayer to increase his income from his employment as an accountant by the acquisition of two years’ overseas experience with a national firm associated with his Australian employer, at the conclusion of which it could have been anticipated with considerable confidence that he would be re-employed in Australia at an increased salary and that the rate of increase of his salary in his remaining professional life would be accelerated.  These considerations provide, to my mind, the necessary “perceived connection” between the outgoing and the assessable income so that it can fairly be said that the outgoing was “incurred in gaining the assessable income” of future years in Australia…

23.     Waddell J’s reasoning was scrutinised in Commissioner of Taxation v Klan (1985) 80 FLR 320. In that case Ormiston J in the Supreme Court of Victoria commented at 330:

… The expenditure in moving to Canada was claimed as a deduction but was described by Waddell J at 383; 4411 as being made in the course of carrying out a plan to acquire overseas experience:

“at the conclusion of which it could have been anticipated with considerable confidence that he would be re-employed in Australia at an increased salary and that the rate of increase of this salary in his remaining professional life would be accelerated”. 

These considerations point to the conclusion that the object and effect of his plan was not to seek new employment and the break in his employment was dictated by the organization of the accounting firm.  If it stands for more, I would not follow Kropp’s case, especially in the light of the learned judge’s reliance on the “perceived connection” test.

24.     The taxpayer in Klan had, in fact, terminated his employment before travelling to Britain to obtain a teaching post there and to undertake research towards a higher degree.  When he returned to Australia he obtained a senior teaching position with a different school from the one where he had originally been employed.  He claimed a deduction for his travelling and removal expenses to Britain.  After analysing Kropp’s case, Ormiston J concluded at 330:

In the end, therefore, it is a question of characterising the acts of the taxpayer as being either incidental and relevant to operations and activities carried on for the earning of assessable income or as a means of obtaining a contract of employment with a new employer.  I have little doubt that Mr Klan’s plans both as originally envisaged and as carried out were directed to the latter end.  They were not mere incidents to his employment.

Is Ms Cheung’s expenditure deductible?

25.     The taxpayer has not demonstrated that her expenditure was “incidental and relevant” to her income-producing activities, or that it had the “essential character” of an outgoing incurred in gaining assessable income.

26.     There was no evidence that the commencement of her diploma course had a nexus with any income-producing activities.  Indeed, the purpose for her coming to Australia was to gain a qualification in the hospitality field and a visa was issued for this purpose.  As for the two semesters of industry placement, these were a compulsory part of the diploma course. It is not the case that the expenditure that she incurred in the first half of 2006 (for tuition and other course fees in relation to the first semester of the degree course) was an “incident” of the second industry placement at the Four Seasons.  Nor was it an “incident” of the later employment she secured at the Shangri-La.

27.     I find that she undertook the degree course with a view to improving her future employment prospects.  She gave evidence that, while a bachelor’s degree was not a required qualification for carrying out the duties of a food and beverage attendant or a room attendant, in the absence of a tertiary qualification one could not expect to progress in an organisation beyond one of those levels.  I can readily infer that that is so.  However, in the circumstances of her case, the undertaking of the degree, coupled with the termination of her employment at the Four Seasons and the Boulevard, is properly seen as an activity directed towards the getting, rather than the doing, of work as an employee: Maddalena.

28.     The Tribunal considered a similar course of education at the same institution in Re Tobias and Federal Commissioner of Taxation (1998) 38 ATR 1169. Senior Member Pascoe summarised that taxpayer’s submissions in the following way, at [4]:

It was submitted for the applicant that the [expenses] were an allowable deduction under the first limb of subs 51(1) of the [1936 Act].  It was said that the applicant embarked on an income earning activity as part of her undertaking or plan to complete the hotel management course.  While it was accepted that the dominant purpose of that undertaking or plan was not to earn assessable income during the second and fourth semesters, it was argued that this did not preclude a deduction for the cost of the undertaking or plan.  It was argued that the earning of assessable income was incidental to the plan and that there was a direct connection between the incurring of the expense and the derivation of assessable income from the work placement within the course…

29.     It seems to me that those submissions, like Ms Cheung’s arguments in this case, misconstrue the test in the relevant provision.  It may well be that there was in the case of Ms Tobias, to use language that is reminiscent of what is now to be found in paragraph 12 of TR98/9, a “direct connection between the incurring of the expense and the derivation of assessable income from the work placement within the course”, or as Ms Cheung put it, “my employment and my study had a real and direct connection”, but that is not enough to pass the test.  The test is whether the expense is incidental and relevant to the derivation of assessable income.  That test is not met by establishing a “connection” – whether a “direct” connection, or a “real and direct” connection – and nothing more.  Nor is the test met by turning the question on its head and setting out to show, as Ms Tobias sought to do, that the derivation of assessable income is incidental to a course of self-education: Tobias at [8].

30.     Because the taxpayer has not shown that the expenditure bears the necessary relationship to income-producing activities – either as an outgoing that is “incidental and relevant” to the gaining of assessable income, or as an outgoing with the “essential character” of an income-producing expense – the expenditure is not deductible under section 8-1 of the Act.  The Commissioner was right to disallow the objection.

31.     The decision under review is affirmed.

I certify that the 31 preceding paragraphs are a true copy of the reasons for the decision herein of Mr S E Frost, Member

Signed:         ..................[sgd]..............................................................
  Associate

Dates of Hearing  24 January 2008
Date of Decision  19 March 2008
Solicitor for the Applicant          Self-represented
Solicitor for the Respondent     Mr R Pandey