88 ATC 142
DJ Trowse M
Administrative Appeals Tribunal
Judgment date: 21 December 1987.
D.J. Trowse (Member): The question raised in this reference is whether the applicant, a constable employed by the South Australian Police Force (``the Force''), is entitled to a deduction pursuant to subsec. 51(1) of the Income Tax Assessment Act 1936 for expenditure incurred towards the gaining of a commercial pilot's licence.
2. In his return of income prepared for the 1985 year of income, the applicant claimed a deduction for the following outgoings which were described, incorrectly as will be seen later, as being incurred in gaining and maintaining a commercial pilot's licence:
Fees for flying 2,657
Maps and charts 30
Medical examination 35
Motor vehicle travel 67
Although that claim had been disallowed by the Commissioner at both the assessment and objection stages, the quantum of same was not in dispute.
3. At the hearing the applicant represented himself and gave evidence under oath. The Commissioner was represented by one of his officers and called as a witness a senior member of the Force who, at all relevant times, was the officer in charge of personnel services.
4. It was in June 1982 that the applicant joined the Force as an adult entrant and commenced his training at the Police Academy. His aspiration was, and still is, to be attached to the Air Wing of the Force and, from enquiries made at the time of recruitment, he formed the view that such a career path was attainable. According to the evidence, officers appointed to that branch enjoyed brighter prospects for promotion and salary increases and it seems that those aspects were of significance to the applicant in seeking to follow such a course of action. In order to be considered for that division, not only must an appointee be a police officer but also he must be suitably trained in the skills of flying. That kind of training was not provided by the Force nor did it offer any form of reimbursement to any employees undertaking private tuition.
5. More specifically, transfer to Air Wing is only available to those officers appointed to the rank of Junior Police Pilot, the position profile of which reads as follows:
``PERSON SPECIFICATION APTITUDES AND SKILLS
Required for entry Code
1. Proven ability as a Police Officer E
2. Ability to deal with the special
physiological factors inherent in
undertaking pilot duties especially in
small planes E
3. Demonstrated maturity E
Required for entry
1. Hold current unrestricted Private Pilot
2. Have undertaken and passed all
theory subjects required for
Commercial Pilot Licence E
3. Have a Commercial Pilot Licence
(The code explanation indicates that ``E'' stands for ``Essential'' and ``D'' stands for ``Desirable''.)
6. Since graduating from the Academy in December 1982, the applicant has been involved in a variety of duties of the kind more normally associated with police work and ranging from traffic control to ``walking the beat''. Currently, he is carrying out clerical duties at State Headquarters. Throughout the whole of the period of his employment he has held the rank of constable.
7. A part-time flying course offered by a company engaged in the business of providing tuition was commenced by the applicant in March 1983 and approximately 12 months later he obtained a restricted private pilot's licence. He then undertook further studies which resulted in him obtaining an unrestricted private pilot's licence in September 1984. Thereafter he pursued a course involving both theory and practical work in order to obtain a commercial pilot's licence. From the training requirements stated above it is noted that passing the theory subjects was regarded as an essential
88 ATC 144
prerequisite for the position of Junior Police Pilot whereas the practical qualification was viewed as desirable. Whilst all theory subjects were successfully completed by December 1986, the number of flying hours required for the practical portion of the course is yet to be attained. From this chronology of events, it will be seen that the expenditure incurred in the 1985 financial year and which is the subject of this reference relates both to the gaining of the unrestricted licence and the commencement of the course from which a commercial pilot's licence could possibly be granted. The applicant confirmed that this was so and acknowledged that the description provided in the return, namely ``incurred in gaining and maintaining a commercial pilot's licence'', was incorrect.
8. In concluding the factual narration, reference is made to the staffing and promotional aspects of Air Wing and, in doing so, it is recorded that the evidence of the senior officer in charge of personnel was of considerable assistance. There are eight officers employed in this division with several classifications ranging from junior pilot to senior pilot. An upgrading in rank carries an automatic increase in salary. Staff turnover is minimal and on average it was estimated that one vacancy becomes available each year. Competition for the position of junior police pilot was described by the senior officer as being ``fairly fierce'' and this is borne out by the fact that eight applicants competed for the last vacancy which occurred in May 1986. On that occasion the taxpayer was one of the unsuccessful applicants.
9. The provisions of subsec. 51(1), as they relate to the current matter, are as follows:
``All losses and outgoings to the extent to which they are incurred in gaining or producing the assessable income... shall be allowable deductions except to the extent to which they are losses or outgoings of capital, or of a capital, private or domestic nature...''
10. This first limb was considered in detail by the High Court in the case of
Ronpibon Tin N.L. and Tongkah Compound N.L. v. F.C. of T. (1949) 78 C.L.R. 47, and the following extracts taken from the joint judgment demonstrate the nature of the relationship which must exist between the derivation of the assessable income and the incurring of the outgoing if such expenditure is to qualify as an allowable deduction. At pp. 56-57 the Court stated as follows:
``For expenditure to form an allowable deduction as an outgoing incurred in gaining or producing the assessable income it must be incidental and relevant to that end. The words `incurred in gaining or producing the assessable income' mean in the course of gaining or producing such income...
In brief substance, to come within the initial part of the sub-section it is both sufficient and necessary that the occasion of the loss or outgoing should be found in whatever is productive of the assessable income or, if none be produced, would be expected to produce assessable income.''
and further at p. 58:
``It is therefore necessary to return to the opening words of s. 51(1) and inquire to what extent the expenditure of the respective companies was incurred in gaining or producing the assessable income. The question is how far was it incurred in the course of, how far was it incidental and relevant to, gaining or producing the assessable income.''
From the foregoing, it is clear that the extent or degree of the relationship between the outgoing and the assessable income is of major importance.
11. In the present reference it is difficult to see that the occasion of the payment is to be found in anything which directly produced the applicant's assessable income either in the 1985 year of income or any time thereafter. Put at its highest, the applicant's claim relies entirely upon the notion that, in the long-term, the incurring of these outgoings may enable him to secure a post which would be more remunerative. Although it seems that the studies undertaken had some small influence upon his duties as a constable, e.g. map reading, that, when taken in isolation, is no warrant for concluding that the payments made were incidental or relevant to the salary earned by him in that position. To the contrary, it is my view that the outgoings were not incidental or relevant to the gaining of the income derived by the applicant during the 1985 year of income.
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12. A recent case which involved a claim for outgoings directed at improving prospects in the future is
F.C. of T. v. Klan 85 ATC 4060. Mr Klan, a history teacher, resigned his teaching post in Australia and travelled to the United Kingdom where he obtained a teaching position. He contemplated that the experience gained from teaching overseas would further his career as a teacher in Australia. Upon his return that expectation was realised. In holding that the outgoings associated with the travel did not qualify as allowable deductions, Ormiston J. had the following to say at p. 4068:
``Although the deduction claimed in Maddalena's case was for rather mundane expenditure, the principles there stated are directly relevant to the present case and they solve the temporal dilemma posed by the requirement that outgoings should be incurred `in', i.e. in the course of, gaining or producing assessable income. It is one thing to assert that it is unnecessary that the outgoing need produce, as a matter of causation, assessable income in the year in which the outgoing was incurred. It is quite another to say that expenditure incurred which is entirely unrelated to existing activities which produce assessable income can come within the section because its object and long-term effect is better to equip the taxpayer to earn income in the future. In my opinion, the taxpayer's removal expenses to Colwyn Bay are properly characterised as outgoings incurred to fit him to obtain employment in new and more remunerative positions as a headmaster or head of a department on his return to Australia. It follows that, as those payments were of `moneys spent to obtain a new employment', they were not allowable deductions as outgoings incurred in gaining or producing assessable income: cf. per Menzies J. in Maddalena's case.''
It should be observed that the expenses incurred by Mr Klan occurred during a period of unemployment and yet, in my view, the above comments have equal application in a situation such as the present, where the duties and functions of the new post are markedly different to those of the one currently occupied.
13. The finding that the outgoings incurred bear little, if any, relationship to the activities engaged in by the applicant in the production of his assessable income and that instead they were directed towards a possible increase in salary at some unknown time in the future is one of the elements to be recognised in determining ``how far was it incurred in the course of, how far was it incidental and relevant to, gaining or producing the assessable income''. Others include the limited opportunities for appointment and the ``fierce competition'' from other suitably qualified officers. Having considered those and other factors, I have reached the conclusion that the nexus between the expenditure incurred and the gaining of assessable income is too remote to attract the operation of the subsection. In the language of the Act, the outgoings were not incurred ``in'' gaining or producing the assessable income.
14. Furthermore, I am of the opinion that the moneys outlaid on flying lessons are properly characterised as outgoings incurred to equip the applicant to obtain employment in a new and more remunerative position totally discrete from the one occupied by him. On that basis the expenditure was incurred in getting, not in doing, his work as an employee. It comes at a time ``too soon to be properly regarded as incurred in gaining assessable income'' - see comments of Menzies J. in
F.C. of T. v. Maddalena 71 ATC 4161 at p. 4163.
15. For the reasons stated above, the Tribunal affirms the Commissioner's decision on the objection.