Commissioner of Taxation (Cth) v Finn

The deduction is claimed by a professional officer in the service of the Government of Western Australia. His claim is that he incurred the expenses of travelling in order the better to fit himself to perform the work which the Western Australian Government required of him, and therefore he became entitled to deduct them under the first limb of s. 51 (1) which provides that all losses and outgoings to the extent they are incurred in gaining or producing the assessable income shall be allowable deductions. The second limb cannot apply because it relates to outgoings of a business and "business" is defined by s. 6 (1) in terms which expressly exclude an occupation as an employee.

It will be seen that the question involved in the case is of an important description. For it is indeed important that officers and employees engaged at a salary in the exercise of a skilled profession should not be in a worse position in respect of the costs of better equipping or qualifying themselves in point of knowledge and skill than are those exercising the same profession as a calling remunerated in fees paid by clients or by the members of the public who, under whatever style, enlist their services. But as the legislation stands such cases cannot, unfortunately, be determined by any very broad proposition of law. For the issue must be whether the expenditure was incurred in gaining or producing the assessable income and, although the meaning and application of this phrase have been elucidated judicially, and perhaps may be further so elucidated, in the end the decision often will depend on the facts of the given case.

The facts of the present case may be thought simple enough but probably they are not very usual. The taxpayer is a senior design architect in the Public Works Department of the State of Western Australia, a Department which he joined in 1926. In 1936 he went to England to further his knowledge and he remained abroad for four years working and studying in Europe and America. He had qualified as an architect in 1932. Apparently the taxpayer remained very interested in his profession but over many years was able to follow the developments of architecture abroad only by literature, periodical and otherwise. He was aware that in 1956 he would be entitled to long service leave and in order to increase the period of his possible absence from duty he accumulated his annual leave for four years. He had determined to devote himself during his leave to the study of architecture abroad. He corresponded with architects and journals abroad and carefully planned an itinerary for architectural inspection and study. He says that the plan concentrated on good architecture, even if his work in the Department largely concerned hospitals, schools, public buildings, offices and the like. Owing to the work he was doing it became necessary to postpone his departure for some eighteen months and in the result he left Perth on 22nd April 1957 for England. He returned to duty on 30th January 1958. For some time before his departure he had been at work designing a building for the Engineering School at the University of Perth. When the taxpayer applied for his leave and explained his purpose and the plans he had made, the Principal Architect of the Department for Works said that he would like him to include a visit to South America to see the modern architectural developments there, particularly features such as sun screening which seemed to have a significance for Western Australia. He was to look at engineering buildings. Through the Premier on behalf of the Government this extension of his plans was arranged and to meet the additional costs the Government made a contribution to his expenses.

For the purposes of computing the deduction which he claims, the costs of his tour abroad, less the Government's contribution, were spread over the whole period of his absence and a proportion taken for that part of it attributable to the year of income ending 30th June 1957. The amount so attributable to that year of income is £352 and it forms the subject of the claim for deduction.

It was admitted on behalf of the Commissioner of Taxation that all the taxpayer's activities abroad were devoted to architecture and its study. He kept a written record of what he did and of the buildings he visited and studied. It is clear that he covered a great deal of architectural ground, that he concentrated upon it for seven days a week throughout his tour and that he made voluminous notes, took numbers of photographs and made many sketches and wrote up reports and records. In short there can be no question that all his available time was devoted to the advancement of his knowledge of architecture and the development of his architectural equipment, outlook and skill. If the point be whether the money claimed as a deduction were laid out for the improvement of his capacity to do the work for which he is paid, there could be no doubt that the whole expenditure was directed to that purpose. But the case for the Commissioner is that that is not the point or, at all events, it is a fact that is insufficient to support the claim for the deduction. In the first place, so it is contended for the Commissioner, the improvement of his capacity to do the work for which he is paid does not mean that he will be paid more, that his title to be paid will be better secured or that any chance of promotion to a higher position will be increased and, if there be any chance of his present status being diminished, that that chance would be lessened or removed. Thus in no way, it is said, were the costs of his search abroad for better knowledge "incurred in gaining or producing the assessable income" derived from the State.

In considering this argument it is perhaps necessary to see exactly where he stood in the service of the Government of Western Australia. He was a member of the Design Section of the Architectural Division of the Public Works Department. He was one of three Senior Design Architects and of these three he stood highest in seniority. Above him in the Design Section was the Principal Assistant. Departmentally there stood above these the Assistant Principal Architect and the Principal Architect. The latter was at that time to retire within a year. As to the taxpayer's salary he was then at the maximum of the range which his grade or classification allowed. It would be by promotion only that he would go into a range of higher salary. If a vacancy occurred in any of the offices above him and it was thought expedient to fill it by the promotion of an officer, the appointment would be made on the recommendation of the Public Service Commissioner who in making it would have regard to the relative efficiency or, if two or more officers were of equal efficiency, to the relative seniority of the officers: see s. 34 of the Public Service Act, 1904-1956 W.A.. Moreover an officer eligible for promotion may appeal on the ground of superior efficiency against the promotion of someone else to an office to which he aspires: efficiency for that purpose includes special qualifications and aptitude for the discharge of the duties of the office: see s. 4 and s. 14 of the Government Employees' (Promotions Appeal Board) Act, 1945 W.A.. In the course of the taxpayer's evidence given before the Board of Review and used in this Court, he was asked whether he believed his period abroad would better fit him for promotion in the future. He answered "I hope so. That was the whole point of the trip. I mean, this is purely from my side of it. The reason why I did it was that the Principal Architect was due to retire at the end of the year and there were two people senior to me, in seniority, and so the purpose of my trip was to gain the extra knowledge to fit myself to perhaps get possible promotion over them."

The words of s. 51 which are most material to the primary question on which the taxpayer's claim to a deduction depends are "incurred in gaining or producing the assessable income". With respect to this phrase, before the consolidation of 1936 was made it was remarked that "the expression "in gaining or producing" has the force of "in the course of gaining" and looks rather to the scope of the operations or activities and the relevance thereto of the expenditure than to the purpose itself": Amalgamated Zinc (De Bavay's) Ltd. v. Federal Commissioner of Taxation [1] . In Ronpibon Tin N.L. and Tongkah Compound N.L. v. Federal Commissioner of Taxation [2] the judgment of the Court contained two or three comments that may be relevant. It was said, "No doubt the expression "in carrying on a business for the purpose of gaining or producing" lays down a test that is different from that implied by the words "in gaining or producing". But these latter words have a very wide operation and will cover almost all the ground occupied by the alternative." [1] . Again, "For expenditure to form an allowable deduction as an out-going incurred in gaining or producing the assessable income it must be incidental and relevant to that end." [1] . There is a third comment which may be added though perhaps it does not go so far, "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." [2] .

1. (1935) 54 C.L.R. 295, at p. 309. 2. (1949) 78 C.L.R. 47, at p. 56. 3. (1949) 78 C.L.R., at p. 56. 4. (1949) 78 C.L.R., at p. 56. 5. (1949) 78 C.L.R., at p. 57.

From the facts that have been stated above three or four conclusions may be drawn which perhaps may be considered to govern the question whether the expenditure was incurred in gaining or producing the assessable income. In the first place it seems indisputable that the increased knowledge the taxpayer sought and obtained of his subject and the closer and more realistic acquaintance he secured of modern developments in design and construction made his advancement in the service more certain, and that in respect of promotion to a higher grade these things might prove decisive. This was put clearly by the Principal Architect, though in a letter written ex post facto, "I understand from you that the Commissioner now desires to know whether the experience obtained and the large amount of data collected will result in an increase in your income. To me, it is obvious that this must increase your professional efficiency, and hence your value to this Department, and must materially assist your future advancement to a higher position in the Department with consequent increase in income." In the second place, so far as motive or purpose is material, advancement in grade and salary formed a real and substantial element in the combination of motives which led to his going abroad. In the third place it is apparent that the heads of his Department, and indeed the Government itself, treated the use which he made of his long service and other leave to study architecture, increase his professional knowledge and study modern trends, as a matter not only of distinct advantage to his work for the State but of real importance in at least one project in hand. In the fourth place it was all done while he was in the employment of the Government, earning his salary and acting in accordance with the conditions of his service. He was in fact complying with the desires, and so far as going to South America was concerned, with the actual request of the Government. His journey abroad and what he did while in Europe, as well as in South America in the following year of income, was therefore in a correct sense incidental to his employment and most relevant to it.

When the foregoing elements are considered in conjunction, they do seem to form a firm foundation for the conclusion that the expenditure was in truth incurred in gaining or producing assessable income. It will be noticed that in the statement of the conclusion the definite article "the" finds no place before the words "assessable income". It is omitted because once again the suggestion appears in this case that the presence in s. 51 of the definite article means that the words "in gaining the assessable income" imply that you must look only at an intent or purpose of gaining or producing the assessable income of the current year of income. It may be remarked that the argument based on the word "the" cannot be regarded as unaffected by the use of the word "in". For it is impossible to suppose that an expenditure directed to gaining future income cannot be allowed as a deduction unless its productive effect within the current year is seen or expected. If, therefore, the word "the" actually was read as limiting the expression that follows to assessable income of the current year, the consequence must surely be that the word "in" is to be read as importing no element whatever of purpose or motive and meaning no more than "in the course of" in a very general sense. The better view, however, is that s. 51 as now drawn does not in either limb require a rigid restriction to the gaining or production of assessable income of the current year. The matter is dealt with in Ward & Co. v. Commissioner of Taxes [1] , and in the case of Amalgamated Zinc (De Bavay's) Ltd. v. Federal Commissioner of Taxation [2] and is alluded to in Ronpibon Tin N.L. and Tongkah Compound N.L. v. Federal Commissioner of Taxation [3] .

1. [1923] A.C. 145, at p. 148. 2. (1935) 54 C.L.R., at p. 309. 3. (1949) 78 C.L.R., at p. 56.

There remains the question whether the taxpayer's expenditure upon his journey in gaining improved and up-to-date architectural knowledge is to be considered as falling within the exception of losses or outgoings of capital or of a capital, private or domestic nature. This question should be answered by a definite negative. The money was laid out by the taxpayer in the acquisition of better knowledge of a skilled profession. The pursuit of information concerning the modernization or improvements in an art is part of the constant process of keeping up to date which skilled professions call upon those who practise them to pursue, though sometimes in vain. Had he dwelt nearer to the sources of such knowledge and information he doubtless would have visited them from time to time in his career. As it was he had been able to do so only once before and in the meantime had depended on literature. It is simply a false analogy to treat him in his visit abroad as engaged in the equivalent of the acquisition of something of an enduring nature and therefore capital. You cannot treat an improvement of knowledge in a professional man as the equivalent of the extension of plant in a factory. Unfortunately, skill and knowledge of most arts and sciences are not permanent possessions: they fade and become useless unless the art or the science is constantly pursued or, to change the metaphor, nourished and revived. They do not endure like bricks and mortar.

I am of the same opinion, and even if the relevance of the expenditure to the respondent's prospects of promotion were to be put on one side I should consider that enough would remain in the facts of the case to entitle him to the deduction he has claimed. His assessable income consisted of or included a salary which was payable from time to time in virtue of his holding the office of a senior design architect in the Public Works Department of Western Australia. It is, I think, a correct application of the terminology of s. 51 to say that he was engaged in "gaining" that salary whenever and so long as he acted in the fulfilment of his office; for the salary payable was his remuneration for everything comprised in or incidental to his service.

The respondent incurred the expenditure during a period of leave, and in carrying out activities beyond any which had been or could lawfully have been specifically required of him by the Government. But it was nevertheless in my opinion incidentally to the proper execution of his office and not otherwise that he engaged in those activities. For the office was of a kind which by its nature made incumbent upon the occupant much more than the performance of set duties at set times. Its professional status implied an obligation of progressive acquaintance with a living and developing art. It was therefore, I think, plainly incidental to the office that the respondent should avail himself of such opportunities as might arise to add, in the interests of the State even if also in his own interests, to his knowledge and understanding of architectural achievements and trends overseas, both in design and in construction, and of endeavours made and being made to solve architectural problems such as might from time to time confront his Government.

In my judgment the respondent, in making the investigations and studies which he pursued during his period of leave, was acting within the scope of his office, and therefore in the gaining of his salary. I would hold that the expenditure which he incurred in the process was an allowable deduction under s. 51 in the assessment of his income tax.

I also agree. Each case of this sort must depend on its own facts. The facts and considerations relevant in this case appear fully in the judgment of the Chief Justice. Generally speaking, it seems to me, a taxpayer who gains income by the exercise of his skill in some profession or calling and who incurs expenses in maintaining or increasing his learning, knowledge, experience and ability in that profession or calling necessarily incurs those expenses in carrying on his profession or calling. Whether he be paid fees by different persons seeking his skilled services from time to time, or be paid a regular salary by one person employing him to exercise his skill, matters not in my opinion. Moreover, it would surely be wrong to assume that the Crown is so indifferent to the professional attainments of those whom it employs that their rights and prospects in its service are not affected by the true measure of those attainments. That was not so in this case. Outgoings incurred for the genuine purpose of acquiring or maintaining knowledge and skill in a vocation do not become an outgoing "of a private nature" simply because the taxpayer got pleasure and satisfaction in increasing his knowledge and attainments.

[Note - The Honourable Mr. Justice Fullagar died at Melbourne before judgment in this appeal was delivered. - Ed.]