Southwell-Keely and Commissioner of Taxation

[2008] AATA 606

Administrative Appeals Tribunal

DECISION AND REASONS FOR DECISION [2008] AATA 606

ADMINISTRATIVE APPEALS TRIBUNAL      )

)   No 2007/3249 – 3250

TAXATION APPEALS DIVISION		)
Re		KEITH SOUTHWELL-KEELY

Applicant

And COMMISSIONER OF TAXATION

Respondent

DECISION

Tribunal Senior Member M D Allen

Date3 July 2008

PlaceSydney

Decision For the reasons given orally at the conclusion of the hearing in this matter, the Decision under review is AFFIRMED.

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

M D Allen
  Senior Member

CATCHWORDS

INCOME TAX – review of objection decisions that disallowed claimed self-education expenses – whether expenditure incidental and relevant to income-producing activities – whether expenditure has essential character of an outgoing incurred in gaining assessable income – university study – practical experience – compulsory industry placement – studies not a condition of continued employment – rate of pay determined by level of job undertaken, not formal qualifications – decision under review affirmed

LEGISLATION

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1936 subsection 51(1)

Taxation Ruling 98/9

CASE LAW

Ronpibon Tin N.L v Federal Commissioner of Taxation (1949) 78 CLR 47

Lunney v Commissioner of Taxation (1958) 100 CLR 478

Re Cheung v Commissioner of Taxation [2008] AATA 220

Commissioner of Taxation v Roberts (1992) 39 FCR 118

Commissioner of Taxation v Cooper (1991) 29 FCR 177

Commissioner of Taxation v Maddalena (1971) 45 ALJR 426

REASONS FOR DECISION

3 July 2008                  Senior Member M D Allen 

1. At the conclusion of the hearing of the above matter the terms of the decision intended to be made and the reasons therefore were stated orally. After service upon the Respondent of a copy of the decision that was in fact made, the Respondent pursuant to sub‑section 43(2A) of the Administrative Appeals Tribunal Act 1975 requested the Tribunal to furnish to the Respondent statement in writing of the reasons of the Tribunal for its decision.

2.      The oral reasons for decision have been transcribed by Auscript, the Commonwealth Reporting Service.  Whereas those oral reasons may reflect the inelegance of an extempore decision, they are in fact the reasons for the said decision.

3.        The said transcript is annexed hereunto and furnished to the Applicant and to the Respondent as it is the reasons for the Tribunal's decision.

I certify that this and the preceding page are a true copy of the decision and reasons for decision herein of:

Senior Member M D Allen

Signed:         [sgd]  Mwela Kapapa     
          ..................................................................................……………………………….

Associate

Date of Hearing  3 July 2008

Date of Decision  3 July 2008

Solicitor for the Applicant            PKF Chartered Accountants & Business

Advisers 

Solicitor for the Respondent       ATO Legal Services Branch

EXTRACT OF TRANSCRIPT OF PROCEEDINGS                [12.31 pm]

MR ALLEN:   By application made 17 July 2007 the Applicant sought review of objection decisions that disallowed claimed self-education expenses in the tax years ending 30 June 2004 and 2005 respectively.  The education expenses disallowed were the payment of fees to Southern Cross University for a degree being a Bachelor of Business in Hotel Management.  After completing his Higher School Certificate the Applicant enrolled in the degree course at Southern Cross University.  The degree required initially 500 hours of practical experience.  This was undertaken by the Applicant at the Hotel Intercontinental, Sydney.

After completion of his compulsory 500 hours industry placement, the Applicant continued employment at the Hotel Intercontinental whilst at the same time completing his degree.  During his time at the hotel, the Applicant progressed, starting as a waiter cleaning tables then progressively becoming a food and beverage attendant at the Café Opera, moving then to Sketches Bar and Bistro which was a promotion, became an attendant at banquets and finally a guest relations officer.  Currently he is an events manager at the Swiss Hotel, Bondi, which hotel is part of the worldwide Accor chain of hotels. 

The Applicant, in evidence, stated that he thought that the course of study undertaken by him was relevant to his progression at the Intercontinental Hotel.  He pointed out that to undertake a career in Hotel Management a degree was essential.  Cross-examined, the Applicant conceded that it was not a condition of his continued employment at the Intercontinental Hotel that he continue his studies.  Likewise, pay rises were based on ability and enthusiasm for the job, that is to say the rate of pay was determined by the level of job undertaken, not formal qualifications.

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.  That means that if you are an employee expenses must be incurred in gaining or producing your assessable income.  Subsection 8-1 subsection (1) of the Income Tax Assessment Act 1997 states 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. There are numerous 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.

For current purposes it is sufficient to note the following two principles that have been identified by the High Court:

(1)The outgoing must be incidental and relevant to the gaining or producing of assessable income (see Ronpibon Tin N.L v Federal Commissioner of Taxation 1949 78 CLR 47 at 56)

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

Certain statements of principle apply in taxation ruling 98/9 being attempts by the Commissioner to provide some practical explanation of the meaning of the law. 

However, as is emphasised in the taxation ruling itself, those statements are all subject to the general principles.  The above comments are taken directly with respectful thanks from the decision of Mr Frost, Member, in Cheung v Commissioner of Taxation [2008] AATA 220. There are many cases which relate to self-education expenses, many of which appear to be contradictory.

The cases were surveyed by Cooper J in Commissioner of Taxation v Roberts (1992) 39 FCR 118. At page 132, his Honour referred to Hill J in Commissioner of Taxation v Cooper (1991) 29 FCR 177 at 197 who, in turn, had referred to the High Court decision of Commissioner of Taxation v Maddalena (1971) 45 ALJR 426. His Honour quoted from Hill J in Cooper (supra) namely:

“In some cases the outgoing in question may precede the income producing operation or activity so that it comes at a point too soon to be incidental and relevant to those operations or activities.  The clear example of such a case is Maddalena.  That expenditure was incurred in getting work rather than doing it, in other words, the expenditure did not itself qualify as a working expense.”

His Honour then continued:

“To use the phrase employed by Hill J in Cooper, those expenses cannot be described as working expenses.  It cannot be said that the taxpayer in the present case in reliance upon the conditions of his employment spent money to earn more, compare Commissioner of Taxation v Hatchett 1971 125 CLR 49 nor can it be said that at the time the expenses were incurred, the taxpayer was acting within the scope of his office and therefore in the gaining of his salary.”

Hatchett’s case (supra) is quite illustrative.  In that case his Honour, Menzies J, allowed expenditure of a school teacher for a teacher’s higher certificate, but disallowed fees for a Bachelor of Arts.  At page 499, his Honour said:

“Here I am not dealing with the general question whether the payment of university fees can ever afford a deduction from assessable income.  I am dealing with the particular question whether the fees paid by the taxpayer in the circumstances already stated are deductible.  As I have said, I am not able to find any connection between the payment of the fees and the assessable income of the taxpayer beyond the circumstance which I take to be self-evident that a teacher who pursued university studies is likely to be a better teacher than if he had not done so and is therefore more likely to obtain promotion within the department.

In my opinion this general consideration is not enough to make the fees deductible.  There must be a perceived connection between the outgoing and the 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 connection with the taxpayer’s assessable income as the fees in fact paid.  In the conclusion that the university’s fees are not deductible, I believe that I am supported by Finn, being Finn’s case, which is supra.”

Exhibit R3 is a copy of a letter to the Respondent from the Human Resources Coordinator of the Hotel Intercontinental, Sydney.  It is in reply to questions asked by the Respondent and those questions formed exhibit R2 in these proceedings.  The letter reads, inter alia, commencing roman paragraph (iv):

Employment was initially part of an internship program in 2003 and then casual employment continued until termination date 6 May 2007. 

(v) There were no conditions to Mr Southwell-Keely’s employment in relation to ongoing participation in his bachelor course. 

(vi) It is not a requirement for all staff members to undertake or hold a degree. 

(vii) The completion of the court did not lead to any increase in wages. 

(viii) The completion of the course was not a guarantee of an offer of a managerial position within the hotel.

(ix) Mr Southwell-Keely’s studies did not get him a promotion nor would it guarantee a promotion within the industry. 

(x) Mr Southwell-Keely’s studies enabled him to maintain and improve his skills and knowledge within his role and within the industry.

The tests required were well-stated by Member, Mr Frost in Re Cheung (supra) at paragraph 29, he said:

“What is required is direct connection between the incurring of the expense and the derivation of assessable income from the work placemen 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.”

At paragraph 30, Mr Frost went on to state that:

“The taxpayer must show 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 income producing expense.”

In this matter, given exhibit R3, I find that the Applicant has not shown that the expense was either incidental and relevant to the gaining of assessable income nor did it have the essential character of an outgoing incurred in gaining assessable income.  To my mind the expenses were, as were the expenses in Maddalena (supra) concerned with the getting of work in the future.  The decision under review is therefore affirmed. 

MATTER ADJOURNED at 12.45 pm INDEFINITELY