Taxpayer and Commissioner of Taxation

[2011] AATA 318

Administrative Appeals Tribunal

DECISION AND REASONS FOR DECISION [2011] AATA 318

ADMINISTRATIVE APPEALS TRIBUNAL      )

)          No   2010/3649 &

TAXATION APPEALS DIVISION		)                  2010/3650
Re		THE TAXPAYER

Applicant

And COMMISSIONER OF TAXATION

Respondent

DECISION

Tribunal M J Carstairs, Senior Member

Date13 May 2011

PlaceBrisbane

Decision The Tribunal affirms the decision under review.

..............[Sgd]................................

Senior Member 

TAXATION – income tax assessment – expenses of obtaining Australian licence and aviation training not incurred in gaining or producing assessable income in taxpayer’s practice as a solicitor specialising in rapid adjudications in building and construction law – decision under review affirmed

Income Tax Assessment Act 1997 (Cth), s 8-1

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

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 Maddalena (1971) 2 ATR 541

Federal Commissioner of Taxation v Studdert 91 ATC 5006

REASONS FOR DECISION

13 May 2011 M J Carstairs, Senior Member

1.      The taxpayer is the Legal Practice Director in a firm of solicitors that specialises in rapid adjudications in building and construction disputes. He sought a private ruling from the Commissioner as to the deductibility of expenses he incurred in converting his New Zealand private pilot’s licence (first obtained in 1982) to an Australian one. The taxpayer hopes to take on aviation matters for local clients. 

2.      The Commissioner ruled that the taxpayer was not entitled to claim these expenses. The parties have agreed to have this matter heard on the papers, filing written submissions.

3.      I have concluded that the Commissioner was correct in refusing to allow the deductions, for reasons which I outline below.

LEGISLATION

4.      Section 8-1 of the Income Tax Assessment Act 1997 (Cth) 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; ….

5.      In these cases the deciding issue will be that of establishing sufficient nexus between the outgoings claimed and gaining assessable income. A relevant starting point is the High Court decision in Federal Commissioner of Taxation v Finn (1961) 106 CLR 60. In that case an architect employed by a government department claimed deductions for expenses incurred on an overseas trip, taken to bring him up to date professionally and to improve his prospects of promotion. Dixon J examined the relevant factors to be taken into account which justified the conclusion that Mr Finn’s activities had the purpose of earning assessable income.

6.      However his Honour’s observations on the factors relevantly to be considered in Finn are coloured by Mr Finn’s employment as a public servant. As such, the discussion of particular factors influencing the outcome on those facts does not make for an easy comparison with the facts here. Nevertheless, one must look behind the particular facts to appreciate the general principle being applied in Finn’s case, which addressed the broader question of whether, in truth, the activity was undertaken to gain or produce assessable income. As Dixon J said in Finn, the meaning and application of the phrase “gaining or producing assessable income” will depend on the facts of each case.[1] As Mr Finn’s outlaid expenses related to his current income producing activities they were deductible. 

[1] (1961) 106 CLR 60 at 64

7.      The High Court again looked at these matters in Federal Commissioner of Taxation v Hatchett (1971) 125 CLR 494, in the context of a primary school teacher claiming expenses outlaid to obtain a higher certificate in teaching; as well as expenses he outlaid for a second university degree in the arts. The High Court concluded that the expenses which related to the teaching certificate were deductable under the first limb and, indeed, had resulted in his being paid a higher salary. The expenses relating to the arts degree, however, were not deductible. Although the employer had encouraged Mr Hatchett to undertake that study, and it was thought likely to lead to promotion - in the sense that any university study will generally enhance an employee’s prospects - that connection was considered too remote.

8.      Hatchett has been the subject of certain criticism, as referred to by Hill J in Federal Commissioner of Taxation v Studdert 91 ATC 5006[2]. However, Hill J’s analysis reveals Hatchett’s consistency with the principles expressed in Finn and in Ronpibon Tin NL v Federal Commissioner of Taxation (1949) 78 CLR 47. In Studdert the taxpayer was a flight engineer who sought deductions for the cost of training as a pilot, on grounds that such training would increase proficiency in his employment as a flight engineer, and improve his chances of promotion. It had been accepted by the Tribunal below that flying lessons indeed improved his proficiency as a flight engineer. Hill J agreed, stating that, looked at objectively, as is required by s 8-1 of the Act, the expenditure had the necessary connection with gaining his income as a flight engineer, regardless of any other possible motivations the taxpayer might have had. 

[2] At p 5012

9.      Self-education to enable the taxpayer to get employment, to obtain new employment or to open up a new income activity generally is not deductible: Federal Commissioner of Taxation v Maddalena (1971) 2 ATR 541. In those instances, the expenses are incurred at a point too soon to provide a sufficient connection to gaining or producing assessable income.[3] 

[3] See also Taxation Ruling 98/9, below at para 15.

10.     The taxpayer’s arguments in support of deductibility here can be briefly stated. As a broad proposition, he maintains that an aviation law specialist should have first hand practical experience of aviation, in addition to knowledge of aviation law.[4] This would help to attract clients and ensure improved income. He noted that the Commissioner acknowledged that “in respect of issues arising out of piloting aircraft, clients would generally prefer dealing with lawyers who have experience as pilots.” He said that the respondent also had accepted that his providing aviation law services would be likely to lead to an increase in his income. He maintains that it should follow naturally from the Commissioner’s two concessions that the deductions be allowed. 

[4] Applicant’s submission dated 21 March 2011, at para 12.

11.     The taxpayer says this would be consistent with Taxation Ruling 98/9 which relevantly provides at paragraphs 12 – 15:

12.Self-education expenses are deductible under section 8-1 where they have a relevant connection to the taxpayer's current income-earning activities.

13.If a 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, the self-education expenses are allowable as a deduction.

14.If 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, the self-education expenses are allowable as a deduction.

15.No deduction is allowable for self-education expenses if the study is to enable a taxpayer to get employment, to obtain new employment or to open up a new income-earning activity (whether in business or in the taxpayer's current employment). This includes studies relating to a particular profession, occupation or field of employment in which the taxpayer is not yet engaged. The expenses are incurred at a point too soon to be regarded as incurred in gaining or producing assessable income.

12.     In addition, the taxpayer maintains that taking on aviation clients would not amount to new income earning activity, as referred to in paragraph 15. 

13.     The taxpayer referred in submissions to a number of decided cases in support of his argument that the expenses he outlaid to convert and update his private pilot’s licence are deductible. Whilst helpful as some sort of guide, it must be remembered that outcomes in other cases are, at best, merely examples of the operation of the principles that come into play in this area of the law. The defining feature behind these principles is that the expenditure must have the essential character of being incurred in gaining assessable income; in other words the expenditure must be “incidental and relevant to” the gaining of assessable income: Ronpibon Tin NL v Federal Commissioner of Taxation (1949) 78 CLR 47. These are questions of fact.

14.     The taxpayer points to the inconsistency in the respondent on the one hand accepting that “providing aviation law services will lead to or be likely to lead to an increase from your current income earning activity in the future” but then asserting that the skills and knowledge he would gain from undertaking the self-education would have little relevance to the provision of aviation law services. The taxpayer also referred approvingly to the Commissioner’s initial position that he would not, by providing aviation law services, be engaging in a new income earning activity.[5]

[5]  Taxpayer’s submission dated 17 December 2010 at p3; T2 at p5.

15.     The taxpayer also objects to the respondent modifying certain arguments in submissions before the Tribunal, departing in so doing from conclusions expressed in the original statement of reasons. I would simply observe here, that if indeed it is the case that the respondent’s position on particular arguments has altered, this is comfortably comprehended within the setting of administrative review. The Tribunal’s task is not to reconsider the basis of the reasoning underpinning the reviewable decision. Rather the Tribunal’s role is to consider the matter afresh.   

ARE THE EXPENSES DEDUCTIBLE?

16.     The expenses claimed would be deductible if there was a relevant connection to his current practice as a lawyer. A different outcome might have pertained in the taxpayer’s case had he been seeking a deduction for expenses related to studying aviation law. Obtaining or updating skill or knowledge in a particular field of current engagement is deductible, on the principles in Finn’s case. But that is not the case presented here. The skill that the taxpayer has is the skill-set of a lawyer. I do not accept that a practicing lawyer seeking to expand into aviation law needs to update an existing pilot’s licence in order to do so. Those are practical, task oriented skills, not related to practice of law with its body of professional knowledge.

17.     In other words, I am not satisfied that the nexus between the outgoings and gaining or producing assessable income is made out here. The taxpayer relies upon an outcome that to my way of thinking is remote; upon which one can only speculate. On the one hand he does not suggest that his current legal practice is other than building and construction disputes, where he does not have aviation clients. Without providing supportive evidence he suggests that the aviation cases will come. This is merely in the realms of possibility. It could eventuate; however the same could be said of any lawyer seeking to branch out into another area of the law.  Without more, we simply do not know.

18.     I regard as speculative the taxpayer’s submission that his income would increase by his holding a pilot’s licence. Again, the taxpayer did not provide supportive evidence for this proposition. The fact that having undertaken a course might result in that taxpayer earning more income does not of itself mean that self education expenses are deductible, just as it is not necessary for an outgoing to be deductible that a taxpayer shows a likelihood of increased income.[6] The nexus referred to in Finn’s case must still be there. 

[6] Studdert at p 5014.

19.     The nexus is absent here. I can agree that it is likely that clients seeking aviation law assistance would be attracted to a lawyer holding the skills of a pilot and experienced in flying. But this provides only an indirect connection to the taxpayer’s expertise as a lawyer. It is analogous to what Menzies J said of obtaining the Arts degree in Hatchett’s case: it could be thought desirable, may make him more rounded in a particular field, it might even be supported by the employer – where the taxpayer is an employee. This is not enough to demonstrate the required connection between the outgoing and assessable income. The taxpayer to my mind has not demonstrated how these practical aviation courses would provide him with any expertise in aviation law - law being the focus of his professional expertise, by which he earns his living. 

20.     I am also inclined to the view that what the taxpayer proposes would amount to a new income earning activity, and not deductible, applying paragraph 15 of TR 98/9. The taxpayer has made plain that his practice is focussed on dispute resolution in building and construction. Aviation law would be a new activity. 

21.     I agree with the Commissioner that the expenses of obtaining an Australian licence and aviation training were not incurred in gaining or producing assessable income in the taxpayer’s practice as a solicitor specialising in rapid adjudications in building and construction law. It is neither related to his current income earning activities, nor will it be likely to lead to an increase in his income from these activities. That is, the taxpayer has not shown the expenditure bears the necessary relationship to income producing activities.

DECISION

22.     The Tribunal affirms the decision under review.

I certify that the 22 preceding paragraphs are a true copy of the reasons for the decision herein of M J Carstairs, Senior Member

Signed: ..................[Sgd]...........................................................
  Danielle Armstrong, Research Associate

Hearing on the papers
Date of Decision  13 May 2011