Khan and Commissioner of Taxation (Taxation)
[2021] AATA 367
•3 March 2021
Khan and Commissioner of Taxation (Taxation) [2021] AATA 367 (3 March 2021)
Division:TAXATION AND COMMERCIAL DIVISION
File Number: 2019/4534
Re:Asad Ullah Khan
APPLICANT
AndCommissioner of Taxation
RESPONDENT
DECISION
Tribunal:Senior Member L Hespe
Date:3 March 2021
Place:Melbourne
The Tribunal affirms the decision under review.
...[sgd]....................................................................
Senior Member L Hespe
Catchwords
TAXATION – income tax – allowable deductions –work-related expenses– self-education expenses – whether incurred in gaining or producing assessable income – decision under review affirmed
Legislation
Income Tax Assessment Act 1997 s 8-1
Cases
Commissioner ofTaxationv Finn (1961) 106 CLR 60
Commissioner ofTaxationv Payne (2001) 202 CLR 93
Federal Commissioner of Taxation v Hatchett (1971) 125 CLR 494
Federal Commissioner of Taxation v Maddalena (1971) 2 ATR 541
Fletcher v Federal Commissioner ofTaxation (1991) 173 CLR 1
Ronpibon Tin NL & Tong Kah Compound NL v Federal Commissioner of Taxation (1949) 78 CLR 47
Spriggs v Federal Commissioner of Taxation; Riddell v Federal Commissioner of Taxation (2009) 239 CLR 1Steele v Deputy Commissioner of Taxation(1999) 197 CLR 459
REASONS FOR DECISION
Senior Member L Hespe
3 March 2021
This is an application for review of the decision of the Respondent dated 9 October 2018 disallowing the Applicant’s objection to an assessment for the year ended 30 June 2017 dated 20 March 2018. The Respondent denied the Applicant’s claim for deductions for self-education expenses.
The Applicant is an aircraft maintenance technician. He commenced employment with Emirates as an aircraft technician in August 2004. During his time as an employee, Emirates had declined to pay for additional training for the Applicant and to allow the Applicant to take unpaid leave to enable him to attend training courses.
During the year ended 30 June 2017, he ceased his employment with Emirates, and he incurred expenditure on self-education to undertake courses in the United Kingdom, Poland and Brisbane to qualify him to perform maintenance on certain additional types of aircraft.
Following completion of the training courses, the Applicant obtained employment with Etihad Airways as an aircraft maintenance engineer, based in Abu Dhabi.
The Applicant claimed he was entitled to deductions for self-education expenses relating to course fees, airfares and accommodation.
Based on the documentary evidence provided to the Tribunal, the Applicant’s self-education expenses related to the following courses:
Date of enrolment
Course Description
5 September 2016
Monarch Aircraft Engineering Ltd general training course conducted between 10 October 2016 and 18 November 2016 and (theoretical training)
5 September 2016
Application for Aviation Australia training course appears to have been conducted between 12 and 17 February 2017
17 November 2016
Monarch Aircraft Engineering Ltd general training course conducted for 10 days between 17 November 2016 and 2 December 2016 (practical training)
3 February 2017
Aviation Australia training course appears to have been conducted between 12 and 17 February 2017
At the hearing, the Applicant did not press deductions for self-education expenses incurred after 4 November 2016.[1] His claims for self-education expenses were thus limited to the costs he had paid between 5 September 2016 and 4 November 2016 towards two courses and related expenditure, in the total amount of $21,067.00.[2]
[1] Transcript of Proceedings, 3 September 2020, 25 lines 25–31.
[2] Applicant’s Amended Statement of Facts, Issues and Contentions, lodged 19 August 2020m 2 [7].
The Commissioner accepted that the expenditure had been incurred.
FACTS
The material before the Tribunal consisted of the documents filed under s 37 of the Administrative Appeals Tribunal Act 1975 (T documents), a written witness statement from the Applicant, documents tendered by the Applicant and the Applicant’s oral evidence.
Based on the evidence before the Tribunal, the Tribunal makes the following findings.
The Applicant commenced employment with Emirates as an aircraft technician in August 2004. As an aircraft technician, he was responsible for carrying out maintenance tasks on aircraft, under the supervision of a licensed aircraft engineer. An aircraft technician requires training in relation to the specific aircraft on which they work.
The Applicant was on a final written warning effective 17 July 2014.[3]
[3] ST4, T documents, 16.
The Applicant had asked Emirates for leave to attend training courses provided by Emirates to enable him to work across more aircraft and be promoted. The Applicant also asked for leave to attend training courses provided by third parties. In each case Emirates declined his requests.
By letter dated 2 August 2016, the Applicant was requested by Emirates to attend a disciplinary hearing on 3 August 2016 to address allegations relating to the Applicant’s conduct. The letter stated:
I must advise you that the Company considers the matters raised above to be serious and that a possible outcome of this meeting could be disciplinary action up to and including termination. Please note, the details of this meeting request are private and confidential and are not to be discussed with, or disclosed to your colleagues.
The Applicant and his employee association representative, Mr Brad Stewart (from the Australian Licensed Aircraft Engineers’ Association (ALAEA)), attended the hearing with Emirates on 3 August 2016.
By letter dated 18 August 2016, the Applicant was notified that he was suspended from his duties on full pay plus fixed allowances, with effect from 19 August 2016. The Applicant was informed that during the period of suspension the Applicant was not to attempt to enter the workplace or attempt to get in touch with any member of the Engineering team. The letter went on to say:
The reason for the suspension is to enable further investigation following the disciplinary hearing meeting which took place on 3rd August. You have received the letter for the disciplinary hearing … which is scheduled for 23rd August 2016 at 1500 hrs …
When all the necessary investigations have been completed you will be informed of the outcome. If, after the investigation, it is decided that no further action is necessary, you will be informed of this and arrangements made for your return to work.
On 21 August 2016, the Applicant confirmed he would attend the hearing scheduled for 23 August with his representative.
On the day of the hearing, the Applicant advised his employer that he was seeking treatment for stress and anxiety, but he would attend the hearing given that some attendees had flown in from Dubai. It appears that, although the Applicant was present at the commencement of the hearing, the Applicant was unable to continue and left. His representative, however, remained present.
Following the disciplinary hearing, by letter dated 24 August 2016, the Applicant was invited to provide any further response in writing to the allegations put to him in the letter of 2 August 2016 and at the hearing of 3 August 2016. The response was due by 26 August 2016.
By email sent on 25 August 2016, the Applicant requested an extension to 5 September 2016 to respond.
The Applicant’s response was set out in an email sent on 30 August 2016. By this time, the allegations made against him also included an allegation that the Applicant failed to maintain confidentiality by discussing confidential matters with a co-worker. In his response, the Applicant noted that he had a pending “Grievance” and that his goal was to come to work and do his job.
In an email sent to the Applicant on 1 September 2016 at 2:14PM, a representative of Emirates wrote:
The outcome of the hearing held in August, have been sent in an email to your support person Brad who was present at both hearings. Kindly reach out to Brad to get the necessary information.
At about 2:18PM on 1 September 2016 the Applicant received an email from Mr Stewart’s email address entitled “Vacation reply”, notifying that Mr Stewart was “not at work until 6 September 2016.”
At about 3:19PM on 1 September 2016 the Applicant emailed Mr Noel Speer (ALAEA National Industrial Officer) and Mr Stewart, saying:
I just received this from Emirates.
Do you have any news for me?
By email, sent on Thursday 1 September 2016 at 7:57PM, Mr Spears, replied that:
I have commenced an extended period of annual leave today and will be flying out to Europe this weekend for several weeks vacation.
I have only now just got to the phone to catch up with emails from today.
Did Brad get in contact with you or did you receive directly from Emirates a copy of their letter of outcome to you and their subsequent proposed terms of settlement proposal?
By letter dated 1 September 2016, Emirates wrote to Mr Khan in a letter entitled “Termination of Employment” (the Termination Letter), advising him that they had determined that the allegations made against him had been substantiated and that:
We advise that Emirates has lost the trust and confidence in you that is required to maintain the employment relationship. Accordingly we have decided to terminate your employment effective 1st September 2016 on the grounds of Gross Misconduct forthwith.
On or about 5 September 2016, Mr Khan enrolled in a course with Monarch Aircraft Engineering Ltd to be conducted in the United Kingdom and paid the sum of $5,440.56 as a 50% deposit for the course. The course was to be conducted between 10 October and 18 November 2016.
On the same day, Mr Khan paid a deposit in the sum of $2,000.00 for a course to be conducted by Aviation Australia in Brisbane to be held between 12 and 17 February 2017.
Following the issue of the Termination Letter, the Applicant and Emirates entered into a dispute resolution process. It appears that the Applicant disputed the termination of his employment on the basis that his dismissal was unfair. The parties engaged in negotiations.
The Applicant filed an application with the Fair Work Commission and the matter was listed for a conference on 3 November 2016.
The parties reached an agreed resolution of their dispute. A Release Agreement dated 4 November 2016 between Emirates and the Applicant relevantly provided:
Background
A.The Employee was employed as an aircraft technician with the Employer in Melbourne (Employment)
B.The Employment was terminated by the Employer for gross misconduct on 1 September 2016 (Ending of Employment)
C.The parties have reached terms of agreement regarding the Ending of Employment on the terms and conditions set out in this agreement.
Operative Provisions
1.Releases
1.1The Employee forever releases and discharges:
(a)the Employer
(b)the Employer and its directors, officers, Executives and agents;
(c)the Employer’s Related Bodies Corporate
from all claims, suits, complaints, inquiries, causes of action, damages … arising directly or indirectly out of the Employment, Ending of Employment and the Resignation (see clause 2.2)
…
2.Benefits
2.1The letter of termination dated 1 September 2016 is rescinded.
2.2The parties agree that the Employment is deemed to have ended by resignation of the Employee (Resignation)
2.3In consideration of the release provided in clause 1.1 of this Agreement and with an express denial of liability, the Employer shall pay to the Employee the amount of AU$42,500 gross, $12,000 of which are general damages and the balance of $30,500 is subject to taxation as required by law (Ex Gratia Payment)
…
2.5The Employer will provide the Employee with a statement of service in the form set out in Appendix A within 7 days from the date the Employee provides this signed Agreement to the Employer executed by the Employee.
The Tribunal was not provided with a copy of Appendix A. However, the Tribunal was provided with a copy of a letter dated 14 December 2016 entitled “Ref: Certificate of Service”. The letter relevantly stated:
This is to confirm that [the Applicant] was employed with Emirates in Australia from 21st August 2004 and the employment ended on 1st September 2016 by reason of [the Applicant’s] resignation.
The Applicant returned the Ex Gratia Payment as an eligible termination payment in his tax return for the year ended 30 June 2017.[4]
[4] ST8, T documents, 59.
The Applicant testified that he did not receive the letter dated 1 September 2016 until 6 September, during the following week because it was sent by mail.
The Applicant testified that notwithstanding the letter dated 1 September 2016, at the time he incurred the expenses, he believed he was employed, and he was going to take unpaid leave to attend these courses. For the reasons set out below, the Tribunal does not accept this part of the Applicant’s testimony.
The Applicant’s oral evidence was that he had wanted to do these courses for years.
EFFECT OF RELEASE AGREEMENT
The Applicant submitted that the effect of the Release Agreement was to negate the termination of the Applicant’s employment so that it effectively and retrospectively reinstated the Applicant as an employee for the period between 1 September 2016 and 4 November 2016.
The Tribunal does not accept the Applicant’s construction of the Release Agreement. The Tribunal concludes that the Release Agreement did not alter the date from which the Applicant’s employment ceased. Rather the Release Agreement purported to change the basis for that cessation from termination to cessation by the Applicant’s resignation. In rescinding the Termination Letter, the Release Agreement was purporting to only change the basis on which the Applicant’s employment ceased and not to alter the date from which the Applicant’s employment ended. The Release Agreement, through the recitals, defined the ending of the employment as the date of 1 September 2016.
This is confirmed by the basis upon which the Applicant’s termination payments were calculated and the statement of service provided to the Applicant (as required by clause 2.5 of the Release Agreement) which support a conclusion that the Applicant did not receive salary or wages or took any form of leave from his employer after 1 September 2016:
(a)The Applicant’s leave consumption report prepared by Emirates for the period commencing 1 July 2016 records the Applicant’s last days of leave as being taken on 7 August 2016.
(b)The payment slip provided to the Tribunal by the Applicant following the hearing said that the Applicant received a sum of $10,292.51 from Emirates on 26 September 2016, consisting predominantly of payments on account of leave not taken and salary and allowances adjusted to 1 September 2016. Although the first section of the payment slip discloses a total for ordinary hours for the pay period 1 September to 30 September of $7,652.92, the second section of the payment slip shows a salary adjustment of minus $7,397.82, thereby reducing the salary component as to reflect a payment to 1 September 2016. Accordingly, although the payment was made on 26 September 2016, it related to matters as of 1 September 2016. There is no evidence that the Applicant was paid for services provided or leave taken or accruing after 1 September 2016.
ISSUE
The issue is whether the expenses incurred by the Applicant in the period up to 5 November 2016 were incurred by the Applicant in gaining or producing his assessable income for the purposes of s 8-1(1)(a) of the Income Tax Assessment Act 1997 (1997 Act). In particular, there was no dispute that:
(a)The Applicant had incurred the expenditure. Rather, the issue in dispute concerned the nexus between the outgoings and the Applicant’s assessable income.
(b)The Applicant derived his income as an employee and was not conducting a business. It is noted that the definition of “business” in s 995-1 of the 1997 Act excludes “occupation as an employee”. The Applicant did not obtain his employment contracts in the course of conducting a business: cf Spriggs v Federal Commissioner of Taxation; Riddell v Federal Commissioner of Taxation (2009) 239 CLR 1.
RELEVANT LAW
For a loss or outgoing to be “incurred in gaining or producing assessable income” the occasion of the outgoing must be “found in whatever is productive of actual or expected income”: Ronpibon Tin NL & Tong Kah Compound NL v Federal Commissioner of Taxation (1949) 78 CLR 47 at 57; Commissioner of Taxation v Payne (2001) 202 CLR 93 at 100 [11].
The reference to “assessable income” in s 8-1(1)(a) of the 1997 Act is not confined to income produced or expected to be produced in the income year in which the expenditure was incurred, but can extend to income expected to be produced in future years: Federal Commissioner of Taxation v Hatchett (1971) 125 CLR 494 at 498 (Hatchett); Fletcher v Federal Commissioner ofTaxation (1991) 173 CLR 1 at 16; Steele v Deputy Commissioner of Taxation (1999) 197 CLR 459 at [43]–[44]..
Outgoings incurred by an employee on self-education will be deductible, if the outgoings have the necessary connection with the employee’s employment, because it is the employee’s employment which is productive of the employee’s assessable income. Self-education outgoings may have the necessary connection with employment where the increased knowledge or skill improves the prospects of advancement, or promotion in the taxpayer’s existing employment or makes the employee more efficient in discharging their existing duties: Commissioner of Taxation v Finn (1961) 106 CLR 60 per Dixon CJ.
The Applicant accepted that consistent with the decision in Commissioner of Taxation v Roberts (1992) 39 FCR 118, self-education expenditure incurred in the absence of an existing employment relationship is not deductible and therefore did not persist with a claim for deductions for expenditure incurred after 4 November 2016. However, the existence of an employment relationship at the time the expenditure is incurred is not sufficient to render self-education expenditure deductible. There must be a perceived connection between the outgoing and production of assessable income: Hatchett (1971) 125 CLR 494 per Menzies J.
CONSIDERATION
On the facts here, the issue which arises is whether it can be said that the Applicant incurred the self-education expenses for the purpose of acquiring or maintaining knowledge or skill in respect of his existing employment. In this respect, it is not sufficient for the Applicant to demonstrate that he was employed at the time he incurred the expenditure. The Applicant must also prove that the expenditure was sufficiently connected with the assessable income the Applicant expected to derive from his existing employment.
The facts here do not support a conclusion that at the time the Applicant incurred the expenses, the undertaking of the courses would better equip the Applicant to perform his existing duties or would assist him in a promotion to a higher grade in his current job. The qualifications resulting from the expenditure were to be obtained by the Applicant upon completion of the courses delivered between September and December 2016, and in February 2017. Any connection with assessable income would be with income derived after completion of the courses: Hatchett (1971) 125 CLR 494 at 496–7. At the time the Applicant incurred these expenses, the evidence supports a conclusion that the Applicant’s existing employment relationship, if not terminated, was in the process of coming to an end. There was no connection between the expenditure incurred on 5 September 2016 and assessable income to be derived from his existing employment relationship.
For the reasons set out below, even if the Applicant did not receive the letter of termination dated 1 September 2016 until it arrived in his mail, the Tribunal does not accept that, at the time the Applicant incurred any of his self-education expenses, there was a prospect of the continuation of the Applicant’s employment relationship in a way that would have enabled him to attend the course (including being overseas for weeks) and that would enable him to benefit from those courses in his existing employment. Notwithstanding his oral evidence, the Tribunal does not accept that at the time he incurred the outgoings for the course deposits, that the Applicant had an expectation that Emirates would grant him unpaid leave to attend the courses, or that he would be granted promotions and derive income from the skills he would acquire.
At the time the Applicant incurred the expenses his relationship with his employer had broken down. In this regard the Tribunal notes that:
(a)His history with his employer was fraught with difficulty. He was under a final warning.
(b)His employer had demonstrated an unwillingness to grant leave to the Applicant to attend courses in the past and had not sought to promote the Applicant.
(c)Prior to incurring the expenses, the Applicant had been suspended from his duties.
(d)At the time he incurred the expenses, the Applicant and his employer had completed a disciplinary hearing in respect of which the Applicant had been advised that his employer company “consider[ed] the matters raised ... to be serious and that a possible outcome of this meeting could be disciplinary action up to and including termination”.[5]
[5] ST3, T documents, 5.
In these circumstances, and irrespective of whether the Applicant received the letter from Emirates on the date it was issued or shortly thereafter, at the time the Applicant incurred the outgoings he had no reasonable basis to expect that the knowledge he would acquire by undertaking a course to be delivered between October and December 2016 and in February 2017 would add to the knowledge and skills he used in his existing employment.
The evidence supports a finding that prior to incurring the costs of the course the Applicant was aware that a letter setting out the outcome of the August 2016 disciplinary hearings had been sent to his support person and that there had been a “settlement” proposal. It is inconceivable that having received an email on Thursday notifying him that his support person had been informed of the outcome of the disciplinary hearing (which the Applicant had been too stressed to attend in person) and that there had been a subsequent settlement proposal, the Applicant made no further effort to contact that support person on the Friday or otherwise seek to find out the outcome, and instead proceed to assume that he would not only be reinstated for duty, but that he would be granted unpaid leave in September, October and December 2016, and February 2017 to undertake courses to prepare him for a promotion. The reasonable inference is that the Applicant incurred the costs of the course, which by his own admission he had wanted to do for years, for the purpose of obtaining employment with a new employer and not for the purpose of acquiring skill and knowledge for his existing employment.
These were not outgoings incurred in the course of earning wages from the Applicant’s existing employment relationship but were a cost of obtaining employment with a new employer (Federal Commissioner of Taxation v Maddalena (1971) 2 ATR 541 at 548–50). The outgoings lacked a sufficient connection with the Applicant’s income producing activities and thus did not satisfy s 8-1 of the 1997 Act.
CONCLUSION
The decision under review is affirmed.
I certify that the preceding 52 (fifty-two) paragraphs are a true copy of the reasons for the decision herein of Senior Member L Hespe
...[sgd]....................................................................
Associate
Dated: 3 March 2021
Date of hearing: 3 September 2020 Date final submissions received: 10 September 2020 Advocate for the Applicant: Mr Peter Jess, Peter W. Jess & Associates Pty Ltd Counsel for the Respondent: Ms Mia Clarebrough Solicitors for the Respondent: Mr Lane, Australian Taxation Office
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