MENZIES J. delivered the following written judgment: -

This is an appeal by the Commissioner of Taxation against a decision of a the taxpayer, a teacher in the employment of the Education Department of Western Australia, was entitled to certain deductions from his assessable income for the year ended 30th June 1967. The deductions in question were a sum of $89 paid in connexion with the submission of theses for the purpose of gaining a Teacher's Higher Certificate and the sum of $71 paid for university fees for subjects in the Faculty of Arts. The university fees were $90 of which $19 had been refunded by the Education Department. (at p495)

2. The Teacher's Higher Certificate is granted by the Education Department depending upon length of service, efficiency as a teacher, the passing of examinations and the submission of theses. Teachers employed by the department are classified in a lower classification, Scale B, or a higher classification, Scale A. Teachers who begin their service at the end of a period of two or three years training are classified B and receive their remuneration in accordance with that scale. Scale B has sixteen grades within which progression is automatic. Scale A has 14 grades within which progression to the 11th grade is automatic. A Teacher's Higher Certificate serves to enable a teacher to transfer from Scale B to Scale A and in Scale A enables progression beyond the 11th grade. It is also a necessary qualification for some positions in large primary schools. Possession of a Teacher's Higher Certificate also carries with it higher salary without change of status. Scales A and B provide basic salaries. Additional remuneration is paid by way of responsibility allowances in positions such as headmasters, deputy headmasters and senior masters in secondary schools. A university degree is necessary for promotion to be a headmaster or a deputy headmaster of a secondary school. (at p496)

3. The taxpayer obtained his Teacher's Higher Certificate effective from 1st July 1967. Theses were submitted in November and December 1966 and in June 1967. It appears that the taxpayer began a university course in 1960 and in the decade to 1970 had passed in six subjects, three before and three after the end of the tax year 1967. The three subjects passed before 1967 were passed in the faculty of education and the taxpayer was, in 1967, credited with these subjects in the faculty of arts - the faculty of education having in the meantime adopted more stringent requirements rendering the taxpayer ineligible to study in that faculty for the time being. (at p496)

4. The taxpayer completed his two years training in December 1949. He was employed as a teacher until May 1950. He then resigned to return to the department in June 1950. He resigned again on 13th March 1951 to return to the service on 10th September 1956. Since that date he has been on the staff of the department. (at p496)

5. The first matter for determination upon the foregoing statement of facts is whether the sums in question were outgoings incurred in gaining or producing the assessable income of the taxpayer. It is apparent that the expenditure in question had nothing to do with the assessable income of the taxpayer for the year in which it was incurred. The last thesis was submitted on 30th June 1967, and the grant of the certificate, with effect from 1st July 1967, had no effect upon the assessable income of the previous year. There was, however, a plain connexion between the obtaining of the certificate and the assessable income of the taxpayer for the year ended 30th June 1968 and subsequent years. This will have to be considered. The payment of university fees, however, seems to me to fall into a different category. Any relationship between any assessable income of the taxpayer and the payment of university fees is problematical and remote. Having regard to the taxpayer's lack of success in passing university examinations it is not possible to find affirmatively that there exists any connexion between the payment of university fees in 1967 and the earning of assessable income at any time in the future. The prospects of the taxpayer obtaining a university degree leading to his promotion to positions in the service for which a university degree is prerequisite affords no ground for concluding that the Commissioner was in error in refusing to allow the fees paid as deductions. If these fees are deductible it must be on a simpler footing, namely that expenditure upon university study, which the department encourages teachers to undertake, is, without more, incurred in gaining assessable income as a teacher. The distinction I have drawn between the two expenditures under consideration means that it will be necessary to consider the payments separately for there are grounds for allowing as a deduction the expenditure to obtain the Teacher's Higher Certificate which do not exist to support the claim to deduct the university fees paid. There is, however, one matter in common to both expenditures that I shall dispose of before turning to consider them separately. (at p497)

6. There has been some suggestion that to equip the taxpayer's mind in order that he may have higher earning capacity is an affair of capital, and reference has been made to John Fairfax & Sons Pty. Ltd. v. Federal Commissioner of Taxation [1959] HCA 4; (1959) 101 CLR 30 This is, I think, a misunderstanding. It seems to me that it would be wrong to consider any of the expenditure here under consideration as an outgoing of capital or of a capital nature. An outlay is of that character when it is expended to obtain what can properly be described as capital in the economic sense. John Fairfax & Sons Pty. Ltd. v. Federal Commissioner of Taxation [1959] HCA 4; (1959) 101 CLR 30 affords an instance of this. In the field of taxation, as in the field of business, "capital" is used in contrast with "revenue"; it has no reference to a man's body, mind, or capacity. Section 51 does recognize that there will be outgoings incurred in gaining or producing income, or in carrying on a business to do so, that are of capital or of a capital nature. Expenditure of this sort is commonly made. Thus, for instance, a taxpayer who is a baker, who buys a van to deliver bread to his customers, makes such an outlay. When s. 51 denies the deduction of an outgoing of a capital nature it directs attention to what an outlay provides rather than to the source of what is outlayed. The same is true of outlays of a "private or domestic nature". The section, it is true, denies deductibility to "losses or outgoings of capital" and, in considering these words, attention is necessarily directed to what is outlayed or lost; they are apt to cover cases where nothing is gained but where part of the taxpayer's capital is lost or paid away. Thus the destruction of the baker's delivery van would provide an instance of capital loss, and the transfer of part of the baker's business to a new and necessary partner, in order that he may assist to carry on the business, would be an outgoing of capital. However, since human capacity is entirely different from "capital", it is not necessary, for the purposes of this case, to consider more closely the references to capital in s. 51. The moneys expended by the taxpayer cannot, I am satisfied, be denied the quality of deductibility because they are "outgoings of capital" or "outgoings . . . of a capital . . . nature". (at p498)

7. The question first to be dealt with is whether the outgoings to obtain the Teacher's Higher Certificate were incurred in gaining the assessable income of the taxpayer. It is now beyond doubt that, in considering this question, consideration must be given to assessable income of future years as well as that of the year in which the outgoing occurs. The evidence to which I have referred establishes that the possession of a Teacher's Higher Certificate would not only enable the taxpayer to earn more in the department in the future, it forthwith entitled him to be paid more for doing the same work without any change in grade. If the certificate had been obtained during a tax year, instead of at the end of a tax year as was the case, it would have entitled the taxpayer to greater earnings in that year. The taxpayer, in reliance upon the conditions of his employment, spent money to earn more. In these circumstances the outgoings necessary to obtain the certificate ought, I think, to be regarded as outgoings incurred in gaining assessable income. This conclusion is, I think, supported by the decision in Federal Commissioner of Taxation v. Finn [1961] HCA 61; (1961) 106 CLR 60, but I will defer an examination of that case until later because it also bears upon other matters in issue. (at p498)

8. My conclusion that the expenditure in gaining the Teacher's Higher Certificate was incurred in gaining assessable income in the circumstances carries with it the conclusion that the expenditure was not of a private nature. It must be a rare case where an outgoing incurred in gaining assessable income is also an outgoing of a private nature. In most cases the categories would seem to be exclusive. So, for instance, the payment of medical expenses is of a private nature and is not incurred in gaining assessable income, notwithstanding that sickness would prevent the earning of income. I am satisfied that the payments here in question, falling, as I decide, into the first category, do not fall within the second. (at p498)

9. It is for the foregoing reasons that I decide that the $89, paid in connexion with the submission of theses for the purpose of gaining a Teacher's Higher Certificate, is a deduction authorized by s. 51. (at p499)

10. The university fees paid were paid with the encouragement of the department; it contributed towards them. This, however, is not, of itself, enough to bring the fees within s. 51. Enlightened employers often encourage employees to improve their bodies and their minds, and assist them to do so. Such encouragement is not, of itself, enough to warrant the deduction of outgoings for these purposes. The test to be applied is a more stringent one, namely were the outgoings incurred in gaining assessable income? (at p499)

11. 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 connexion between the payment of fees and the assessable income of the taxpayer beyond the circumstance, which I take to be self-evident, that a teacher who has 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 connexion between the outgoing and 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 connexion with the taxpayer's assessable income as the fees in fact paid. In the conclusion that the university fees paid are not deductible, I believe that I am supported by Federal Commissioner of Taxation v. Finn [1961] HCA 61; (1961) 106 CLR 60 and to that authority I now turn. (at p499)

12. There, the travelling expenses of an overseas tour made by the taxpayer, a senior design architect in the Public Works Department of Western Australia, were allowed as a deduction from his assessable income on the footing that the amount claimed was incurred in gaining assessable income. The taxpayer made the trip during a period of leave to bring himself up to date with current trends in architecture and to better his prospects of future promotion within the department. Part of the tour was made at the request, and at the expense of the department. During the tour the taxpayer devoted all of his time to the advancement of his knowledge of architecture and the development of his architectural skill. In these circumstances Dixon C.J. said (1961) 106 CLR, at p 67:

". . . 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 . . . 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."

"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.

. . .

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."

Each citation emphasizes a relationship between the assessable income and the outgoing incurred to gain it. (at p500)

13. Windeyer J. used language more helpful to the taxpayer here when he said (1961) 106 CLR, at p 70:

"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." (at p501)

14. As I have already indicated, this decision seems to me to support the allowing of the taxpayer's expenses of obtaining a Teacher's Higher Certificate as a deduction because, by obtaining it, the taxpayer effectively gained income; but the very limitation, emphasized by Dixon C.J. and Kitto J., that there must be a connexion between the expenditure and assessable income seems to me to require the disallowance of the university fees here paid by the taxpayer. Windeyer J., by reason of his use of the words "necessarily" and "in carrying on", seems to me to have treated the expenditure in Finn's Case as within the second limb of s. 51, i.e. outgoings necessarily incurred in carrying on a business, but, as Dixon C.J. pointed out (1961) 106 CLR, at p 63, that case had to be decided by reference to the first limb. As his Honour said, "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". This applies here. The payment of university fees was, I think, expenditure of a private nature notwithstanding the assistance given by the department. (at p501)

15. Accordingly, I allow the appeal of the Commissioner in relation to the sum of $71 paid for university fees, and I dismiss it in relation to the sum of $89 paid as expenses in obtaining the Teacher's Higher Certificate. The assessment should be amended accordingly. (at p501)

16. In the circumstances I make no order as to costs. (at p501)

Appeal allowed in relation to the sum of $71 paid for university fees, but otherwise dismissed. Assessment to be amended accordingly.