Mandikos and Commissioner of Taxation - [2001] AATA 716

DECISION AND REASONS FOR DECISION [2001] AATA 716

ADMINISTRATIVE APPEALS TRIBUNAL )

) No QT2001/38

TAXATION APPEALS DIVISION         )
           Re      MICHAEL MANDIKOS
  Applicant
           And    COMMISSIONER OF TAXATION
  Respondent

DECISION

Tribunal Mr KL Beddoe (Senior Member)

Date16 August 2001
PlaceBrisbane

Decision      The Tribunal sets aside the decision under review and remits the matter to the respondent with the following directions: (a)      that a deduction of $3026 be allowed by way of amended assessment; and (b)     the objection is otherwise disallowed. The Tribunal certifies that these proceedings have terminated in a manner favourable to the applicant.
  (Sgd) K L Beddoe
  Senior Member
Decision No: 716/2001
CATCHWORDS
Taxation – allowable deductions – work related self-education expenses – post-graduate studies – whether overseas costs of meals, accommodation, travel deductable – whether home base a relevant criterion – essential character of expenditure
Income Tax Assessment Act 1936 s 51

Case T78 86 ATC 1094
Case U186 87 ATC 1066
FC of T v Cooper 91 ATC 4396
FC of T v Finn (1961) 106 CLR 60
FC of T v Highfield 82 ATC 4463

REASONS FOR DECISION

16 August 2001 Mr KL Beddoe (Senior Member)

The applicant seeks review of an objection decision made in relation to the year of income ended 30 June 2000 but because of carry forward losses relating, in fact, to the income years ended 30 June 1996 and 30 June 1997.
At issue is the applicant's claim which can be generalised as a claim for costs of living being the costs of meals, accommodation and travel in connection with the applicant's attendance at a post-graduate course in prosthodontics. The applicant attended the Masters program at the University at Buffalo in the United States of America over a period of 3 years and completed the course of study in June 1998.
The question at issue is essentially whether the expenses claimed are allowable deductions within the terms of s 51 (1) of the Income Tax Assessment Act 1936 ("the Act").
At the hearing the applicant was represented by Mr Darley and the respondent was represented by Ms Gilligan. The documents lodged in the Tribunal pursuant to section 37 of the Administrative Appeals Tribunal Act 1975 were placed before the Tribunal as the "T" documents and further documents were tendered and marked as exhibits. Oral evidence was given by the applicant. The facts of this matter are not really in dispute and I make the following findings of fact.
In his return of income for the year ended 30 June 1996 the applicant claimed itemised "overseas education expenses" as follows:
Rent  $4,853          (X)
Utilities   2,125 (X)
Telephone   1,912
Home expenses   3,446  (X)
Motor vehicle expenses  6,379  (5,791 disallowed)
University fees  16,585
Text books  541
Photography  1,751
Stationery  1,186
Postage  213
Groceries  3,542  (X)
Professional equipment  1,365
Public transport  1,093
Meals out  539 (X)
  ________
  $45,530
  ________
(X) = Claims disallowed

The disallowed claims which are now in dispute total $14,505 for living expenses and $5,791 for motor vehicle expenses.

The applicant's return of income for the year ended 30 June 1997 included the following claim "work related self education expenses $35,442". No details were supplied to the respondent. Following an audit the following were disallowed:
Living expenses $12,957
Photography 1,517

The respondent accepts that the applicant's claims have been substantiated (Exhibit A). Accordingly this Tribunal has not enquired into any issue as to whether the claimed amounts have been incurred by the applicant.
The applicant was employed as a dental practitioner working 5 days a week on the Gold Coast and also working 1 day a week in Brisbane. He maintained accommodation on the Gold Coast and also lived at the family home at New Farm when he was in Brisbane. It seems residence on the Gold Coast and residence at New Farm was on about a 50-50 basis but with some predominance in some weeks for living at the unit on the Gold Coast.
I am satisfied that the applicant was in effect a part-time resident at the unit on the Gold Coast and a part-time resident at the family home at New Farm. That changed in the period prior to the applicant going overseas because of the reduction in the amount of work that he was performing on the Gold Coast and an increase in work at the Brisbane practice with the result that he spent more time staying at the family home in New Farm and that eventually became seven nights a week.
The applicant enrolled for a post-graduate course at the University of Buffalo and he departed Australia on 16 July 1995 for the purpose of undertaking those post graduate studies. There is no issue as to whether or not the post-graduate studies have the relevant connection with the applicant gaining or producing an assessible income because the Commissioner has already conceded what might be called the study expenses are allowable deductions within the terms of section 51(1) of the Act being the applicable provision in the years of income ended 30 June 1996 and 30 June 1997.
The applicant obtained accommodation in Buffalo in shared accommodation and it appears that it was shared, at least in the first two years of his attendance there, with academics also at the University.
The applicant made a statement dated 12 March 2001 which has been incorporated into the applicant's Statement of Facts and Contentions in these proceedings. The applicant's statement sets out in considerable detail his place of abode between 16 July 1995 and when he returned to the family home in July 1998. I note however, that in the period from 13 August 1997 which is actually outside the period under consideration by the Tribunal, he then proceeded to live in shared accommodation with a woman who is now his spouse. So far as I can see nothing turns on this fact although an issue was made of it by the respondent's representative in the course of cross examination.
The applicant's evidence satisfies me that he took a considerable amount of personal effects with him to Buffalo while he was a post-graduate student at the University but the more substantial items of property such as furniture and many other goods were stored in his own self contained area in the family home at New Farm. He said, and I accept, that he had a room set aside for his personal use and I understood that use to be exclusive use and that he always maintained that room and the living area connected with it for his purposes when he was living in the family home in New Farm. The applicant's area, he says, was self-contained from the rest of the family and it was accepted as being his place of residence as he required it.
Consideration
In Tax Ruling 92/8 the Australian Taxation Office dealt with its policy in relation to the deductibility of self-education expenses. In particular paragraph 41 of that Tax Office Ruling reads as follows:
"41. Fares and accommodation and meals expenses incurred on overseas study tours, on work-related conferences or seminars attended away from a taxpayer's home base or on attending an educational institution away from the taxpayer's home base are allowable under subsection 51(1). They are part of necessary cost of participating in the tour or attending the conference, the seminar or the educational institution. We do not consider such expenditure to be of a private nature, because its occasion is the taxpayer's travel away from his or her home base on income-producing activities."

That Tax Ruling was subsequently withdrawn and replaced in effect with Tax Ruling 98/9 also dealing with deductibility of self-education expenses. The Ruling was released on 17 June 1998 which is a date after the years of income under consideration before this Tribunal, but paragraphs 88 and 89 of that Ruling are, although different in their terms, to the same general effect as paragraph 41 in the earlier ruling.
In Case T78 86 ATC 1094 I decided that self-education expenses incurred by a barrister undertaking post-graduate course studies at Cambridge University were allowable deductions within the terms of section 51 of the Act. In that case the applicant's claim was for travel expenses, university fees, and costs of accommodation, meals etc incurred by the taxpayer while he was staying in residence at Cambridge University. In making that decision I took into account the fact that the applicant was already admitted to practice as a barrister but had, prior to his travel overseas to Cambridge, been employed as a law clerk in a firm of solicitors.
I understand that the respondent Commissioner subsequently issued a Taxation Ruling accepting the decision. However, I note that one of my then colleagues Senior Member Roach in Case U186 87 ATC 1066 at 1071 has severely criticised the decision and refused to follow it. I have considered the dicta of Senior Member Roach in Case U186 and remain of the view that Case T78 was then correctly decided and the criticism of the learned Senior Member is unwarranted. Case U186 involved a factual situation which was distinguishable from the situation in Case T78.
I note that the respondent Commissioner has not sought to rely on Case U186 in the present proceedings. I also note, although little weight should be attached to it, that in the present case the applicant maintained his employment as a dentist in Australia by continuing to work in the practice on occasions when he returned to Australia during the course of his studies at the University of Buffalo. He also returned to that employment upon his return to Australia, but now practises on his own account.
In FC of TvCooper 91 ATC 4396, the Full Court of the Federal Court had to consider a matter involving allowable deductions in relation to a professional footballer. The factual basis for that case is quite different to the factual basis for the present case but the decision itself is important and in particular because the Federal Court considered the application of section 51 in some detail in the context of deductions for food.
The law is, with respect, summarised by Lockhart J at pages 4399 and 4400 where His Honour sets out what is an effective summary of the law up until that time. His Honour said:
"The phrase "incurred in gaining or producing assessable income" in the first limb of s. 51(1) has been construed to mean incurred in the course of gaining or producing assessable income: Amalgamated Zinc (De Bavay's) Limited v FC of T (1935) 3 ATD 288; (1935) 54 CLR 295 per Latham C.J. at ATD 293; CLR 303 and Dixon J; at ATD 297; CLR 309; W. Neville and Co. Limited v FC of T (1937) 4 atd 187; (1936-37) 56 CLR 290 per Dixon J. at ATD 196; CLR 305; Ronpibon Tin NL v FC of T (1949) 8 ATD 431; (1949) 78 CLR 47 per Latham C.J., Rich, Dixon, McTiernan and Webb JJ. at ATD 435; CLR 56-7.
For expenditure to be an allowable deduction as an outgoing incurred in gaining or producing the assessable income, it must be incidental and relevant to that end; Ronpibon at 56. This test of deductibility has been explained in subsequent judgments of the High Court, so that to be deductible the expenditure must be incidental and relevant in the sense of having the essential character of expenditure incurred in the course of gaining or producing assessable income. This formulation of the test has its origins in the joint judgment of Dixon C.J., Williams, Webb, Fullagar and Kitto JJ. In Charles Moore and Co. (W.A.) Pty. Limited v FC of T (1956) 95 CLR 344 at 351. It has been applied subsequently in cases which include Lunney v FC of T (1958) 11 ATD 404 at 412; (1957-58) 100 CLR 478 at 497; Handley v FC of T (1981) ATC 4165 at 4171; (1980-81) 148 CLR 182 at 194; FC of T v Forsyth (1981) ATC 4157 at 4161; (1980-81) 148 CLR 203 at 210; John v FC of T (1989) ATC 4101; (1988-89) 166 CLR 417. The essential character test is also applied to determine if the expenditure is of a capital, private or domestic nature as these cases illustrate.
Outgoings incurred in gaining or producing assessable income and outgoings of a capital or domestic nature are not mutually exclusive; Ronpibon Tin at 56; Forsyth, John at 427. It was decided in John that there is no "necessary antipathy between a loss or outgoing incurred in gaining or producing assessable income and a loss or outgoing of a private nature": John at ATC 4108; CLR 431.
It is relevant to have regard to the terms and conditions of a taxpayer's employment in determining whether expenditure incurred by an employee satisfies the first limb of s. 51(1): Finn v Commissioner of Taxation (1961) 106 CLR 60 per Kitto J. at 69; Hatchett v Federal Commissioner of Taxation (1971) 125 CLR 494.18."
A case with a similar fact situation to the present case is the decision of the Supreme Court of NSW FC of T v Highfield 82 ATC 4463. That was also a case involving a dentist who travelled overseas to undertake a post-graduate degree in periodontics. The taxpayer in that case, Mr Highfield, had been practising as a dentist in general practice and some time after he returned to Australia went into a speciality of periodontics. On the facts in the report, when he returned to Australia he resumed practice as a dentist who also provided periodontic services although not that of a specialist periodontist. The Supreme Court allowed the taxpayer's claim which included airfares, university fees, meals and accommodation. The claim had initially been allowed by the Taxation Board of Review and the decision of the Supreme Court was to dismiss an appeal from the Board of Review's decision. The respondent distinguishes Highfield's case on the basis that the taxpayer in that case maintained his Australian home while he was overseas doing the post-graduate study whereas the respondent says that in the present case the applicant did not maintain an Australian home. That is not of course, the evidence of the applicant. The applicant said in his evidence that he had at all relevant times maintained an Australian home because he maintained his own part of the family home at New Farm. I think the correct conclusion from the applicant's evidence in this case is that the he did not maintain a home in Australia as such, although he had access to a home at all relevant times and he returned to that home on occasions during the course of his 3 years of his studies at the University of Buffalo.
I think the applicant's representative correctly asserted that on the material before the Tribunal, the applicant attended the University of Buffalo for three distinct periods of approximately 10 months and at least part of the periods when he was not at University he had returned to Australia. If the issue was whether the applicant was a resident of Australia I would have no doubt that would be the situation. However the Commissioner in his Tax Ruling does not refer to residency and quite properly so in my view, but does refer to a concept of home base. It seems to me that it makes no difference to a concept of home base as to whether the applicant was absent from Australia for a period of less one year or for three periods of less than one year. In either circumstance it may be correct to say that the applicant had maintained a home base in Australia.
However, I am not satisfied that the concepts of home base are relevant in the context of s 51 of the Act. I think the law is as set out by Justice Lockhart and quoted above and that the test is the essential character of the expenditure incurred. Whatever the views may have been prior to the decision of the Federal Court in Cooper it is now my understanding of the law that it will only be in situations where there is a direct association between the incurring of expenditure for meals and accommodation and the deriving of assessable income that the cost of meals and accommodation would be an allowable deduction.
In the Cooper case the Taxation Board of Review had found that there was a connection between the taxpayer's employment as a professional footballer and the direction by his coach to, in effect, bulk up by eating an additional meal (and a prescribed meal at that) each day so as to maintain his weight level during the football season. That decision of the Board of Review, although upheld in effect in the Supreme Court, did not survive the proceedings in the Full Court of the Federal Court. As I understand the decision it is authority for the proposition that except where there is a direct connection between the incurring of the accommodation and meal expenses and the deriving of assessable income the accommodation and meal expenses will be essentially expenses of a private nature and to be characterised accordingly.
It may well be the case that decisions which allowed deductions for accommodation and meal expenses such as the decision in Case T78 and the decision of the Supreme Court in Highfield are no longer good authority in the light of what the Federal Court said in Cooper.
Taking all the material before me into account and the submissions of the parties, I am satisfied that the applicant incurred expenditure in the nature of self education expenses including the cost of meals and accommodation while pursuing post-graduate studies at the University of Buffalo. I am not satisfied that a concept of home base is a relevant criterion to determine the deductibility of the expenditure. However I am satisfied that I am required to characterise the nature of the expenditure and in this case in particular the nature of the expenditure for accommodation, meals and private use of a motor vehicle while the applicant was attending the University.
I am satisfied that the essential character of the expenditure on meals and accommodation and the private use of the vehicle in the sense of nonstudy use is expenditure incurred in the course of gaining the applicant's income in the sense allowed by the High Court in FC of T v Finn (1961) 106 CLR 60. The expenditure is however to be characterised as private expenditure and therefore not an allowable deduction within the terms of s 51(1). I accept that coming to that conclusion is inconsistent with the decision of the Supreme Court in Highfield and also inconsistent with my previous decision in Case T78 but I think I am bound to follow what the Federal Court said in Cooper and it is because of Cooper's case that I have come to the conclusion that there is not the direct relationship between the deriving of assessable income and the incurring of the accommodation, meals and other expenses while overseas so that the essential character of the expenditure in question is properly characterised as private expenditure rather than expenditure which would otherwise be allowable within the terms of s 51(1).
As I have already said, I am satisfied that the expenditure was incurred in the course of gaining or producing assessable income because that is the effect of the decision of the High Court in Finn. However, the essential character test must be applied again to decide as to whether or not the expenditure is expenditure of a private nature. I have come to the conclusion that the subject expenditure is excluded from deductibility because of its essential character of private expenditure.
The Commissioner has conceded that an amount of $3,026 as a loss carried forward should be allowed to the applicant. That concession has nothing to do with the merits of the issue that was argued before this Tribunal but rather reflects what can only be described as a fairly serious error on the part of the officer who decided the objection and the deduction of $3,026 is simply allowed as a loss carried forward and not for any reason that was in issue before this Tribunal. However the formal decision of the Tribunal must be to set aside the objection decision under review and remit the matter to the respondent with a direction that the deduction of the amount $3,026 be allowed to the applicant. It follows in my view that I should certify that these proceedings have terminated in a manner favourable to the applicant.

I certify that the 29 preceding paragraphs are a true copy of the reasons for the decision herein of Mr KL Beddoe (Senior Member)
Signed:         .....................................................................................
  Associate
Date/s of Hearing  10 July 2001
Date of Decision  16 August 2001
For the Applicant  Mr Darley
For the Respondent                 Ms Gilligan