Is the relevant medical expenditure deductible under s 8-1 ITAA 1997?

1. The substantive issue in this case is whether the Applicant can deduct the relevant medical expenses under s 8-1 of ITAA 1997. To be deductible under that provision, expenditure must satisfy the "positive limb" (s 8-1(1)) and also not get caught by the "negative limb" (s 8-1(2)). The positive limb requires that, for expenditure to be deductible, it must be incurred in the gaining of one's income or in the course of one carrying on a business. The negative limb requires that the expenditure not be capital or private in nature, that it not be related to earning income that is exempt, and that its deducibility is not prevented elsewhere in the ITAA 1997.
2. The relevant rule for the purposes of this decision is s 8-1(1)(a), which provides that a taxpayer can deduct from their assessable income 'any loss or outgoing to the extent that [i]t is incurred in gaining or producing [the taxpayer's] assessable income' (italics added). For the reasons given below, the Tribunal finds that the positive limb of s 8-1 is not satisfied; it therefor need not and does not address the question of whether the relevant medical expenditure was private in nature.
3. Under s 8-1(1)(a), a causal connection between the expenditure incurred and the earning of income is necessary but not sufficient for deductibility; it is not enough that the purpose of an expenditure is to put the taxpayer into position to earn income, the expenditure must be incurred in the course of the income-earning activity itself. As the High Court explained, 'It has long been established that 'incurred in gaining or producing' is to be understood as meaning incurred 'in the course of' gaining or producing'.[21]
4. A leading authority on the question at hand, Maddalena,[22] involved a taxpayer who was both an electrician and a professional rugby league player. While he was a member of a rugby league club in Wollongong (Wests), he incurred travel and legal expenses when he sought (and got) a new employment contract with a club in Sydney (Newtown). The Court held that the taxpayer's expenditure to obtain an employment contract was not deductible because it did not have the requisite connection to the earning of income; it was incurred before, not in the course of, deriving income. Menzies, J, considered, by way of illustration, the taxpayer's earnings as an electrician:

Had the taxpayer claimed as a deduction the expenses of changing from one job to another as an employee electrician his outlay would not have been an allowable deduction. The expenditure would have been incurred in getting, not in doing, work as an employee. It would come at a point too soon to be properly regarded as incurred in gaining assessable income.[23]

5. The parties both addressed the applicability of a tax ruling that has since been withdrawn.[24] Though it is no longer in force, it is worth noting that the ruling applied to current, rather than prospective, employees, and included the following illustrative examples:

Licenses: A deduction is allowable for the cost of renewing licences held by an airline employee in respect of his or her employment. A deduction is not allowable for the cost of obtaining the initial licence. > > Medical examinations for licence renewal: A deduction is allowable for the expenses associated with medical examinations for the renewal of relevant licences. These expenses include the cost of the travel to and from the medical practitioner.

6. The parties both also addressed the Australian Tax Office (ATO) website page regarding the deductibility of pilot expenses, which includes the following illustrative guidance:

Medical examinations > > You can claim a deduction for medical examinations that you must take to fulfil your health assessment requirements associated with the renewal of your work-related licences. > > For example, you can claim your regular aviation and medical appointments and examinations required by the Civil Aviation Safety Authority. This includes the cost of the travel to and from the medical practitioner. > > You can't claim a deduction if you undertake a pre-employment medical examination, even if you must have it as a condition of employment.[25]

7. With regard to the above examples, Mr. Farley's relevant medical expenditure is akin to the "initial license" and the "pre-employment medical examination" that are required to get a job, rather than the expenditure related to "renewals" of existing licenses for an existing job.
8. The evidence clearly establishes, and the Tribunal accepts, that Mr. Farley's employment as a pilot commenced on 14 March 2022. The Employment Contract provides that the employment commencement date was 14 March 2022,[26] and a variety of communications confirm that date.[27] Mr. Farley also confirmed at the Hearing that he started his employment as a pilot on 14 March 2022.
9. The Tribunal considers that the relevant medical expenses incurred by Mr. Farley merely put him in a position to undertake employment as a pilot, and as such are not deductible under s 8-1(1)(a) ITAA 1997. The expenses were incurred to get work, not in the course of doing work. As such, they were incurred functionally "too soon". The relevant test is not entirely temporal (thus the modifier "functionally"), and so even the relevant medical expenses that were incurred after Mr. Farley's employment commencement date were incurred in getting the employment and were not incurred in the course of earning assessable income.

1. As the relevant medical expenses are not deductible, the Applicant has not discharged his burden of proving that the assessment in question was excessive or otherwise incorrect. Thus, the reviewable Objection Decision is affirmed.

Ms. Carly Bayly, Lawyer, Australian Taxation Office, Office of the Chief Tax Counsel, Litigation and Legal Services

[1] Though not at issue in this case, the relevant substantiation rules define a "work expense" as a "loss or outgoing you incur in producing your salary and wages". s 900-30(1) Income Tax Assessment Act 1997 (Cth) (ITAA 1997).

[3] Respondent's SFIC at [32], Hearing Book, p. 305.

[4] s 14ZZK(b)(i) Tax Administration Act 1953 (Cth) (TAA 1953).

[6] Hearing Book, T1, p. 47. It is not clear exactly when the medical episode leading to the suspension of the Applicant's license occurred, or when the suspension came about.

[10] Up until the Hearing, the proceedings also involved Mr. Farley's claim to a deduction for "optical expenses" (the purchase of sunglasses). At the Hearing, Mr. Farley withdrew his claim for a deduction for optical expenses. The withdrawal was foreshadowed by Mr. Farley's submission to the Tribunal in his 20 July 2025 letter, in which he wrote in response to the Respondent's inquiries regarding his optical expenses, "further specifications as requested cannot be obtained. There [sic] please delete reference". Hearing Book, T12, p. 295. At any rate, the Tribunal affirms the Objection Decision as discussed herein.

[11] See the Applicant's version in the materials filed along with his objection letter to the Respondent dated 14 February 2024 (Objection), Hearing Book, T8, p. 212; the Applicant's version in his application for review (Application for Review), Hearing Book, T1, p. 59; and the version in the Respondent's SFIC at Schedule 1 thereto, Hearing Book, pp. 310-11.

[12] The Respondent's SFIC contended (at [44], Hearing Book, p. 307), that the Tribunal has jurisdiction to consider expenses totalling only $22,272, that being the amount contended in the Applicant's Objection. This total appears to be a calculation error on the part of Mr. Farley, as his Objection listed the relevant medical expenses, and their amounts, as listed in Schedule 1 of the Respondent's SFIC (with the exception that it included one item twice and recorded an erroneous total amount). The Respondent's SFIC corrects for the double-counting and the calculation error. (Mr. Farley's Application for Review included an accounting that differed slightly from the one in the Respondent's SFIC, which is accepted by the Tribunal, due to an apparently different exchange rate applied to amounts paid in foreign currency as well as some differing amounts claimed for various individual expenses. Hearing Book, T1, p. 59). Section 14ZZK(a) of TAA 1953 provides that an applicant's application for review is limited to the grounds stated in their objection, unless the Tribunal orders otherwise. The Tribunal considers that Mr. Farley's "grounds" for objection are that the identified individual expenses enumerated in his Objection (which were repeated in his Application for Review) are deductible as work-related expenses, rather than the (erroneously or variably) calculated total amount of those expenses. Mr. Farley is not asking for a consideration of any expenses to which he did not originally object. At any rate, the Tribunal orders that the correct quantum of the relevant medical expenses under consideration in this decision is $26,015, as was discussed at the Hearing.

[20] On 14 October 2024, the Administrative Appeals Tribunal (AAT) became the Administrative Review Tribunal (the Tribunal). Under the transitional provisions in the Administrative Review Tribunal (Consequential and Transitional Provisions No. 1) Act 2024 (Cth), proceedings in the AAT that were not finalised before 14 October 2024 are to be continued and finalised by the Tribunal. Anything done in relation to the proceeding before 14 October 2024 is taken to have been done by the Tribunal.

[21] Federal Commissioner of Taxation v Payne [2001] HCA 3 at [9] (internal citations omitted).

[22] Federal Commissioner of Taxation v Maddalena (1971) 45 ALJR 426, 427 (Menzies, J).

[24] Taxation Ruling TR 95/19W, Income tax: airline industry employees - allowances, reimbursements and work-related deductions, withdrawn (with effect 19 June 2025).

[25] ATO website, Pilots - income and work-related deductions, Pilot expenses G-O (at 9 February 2026), https://www.ato.gov.au/individuals-and-families/income-deductions-offsets-and-records/guides-for-occupations-and-industries/l-q/pilots-income-and-work-related-deductions/deductions-for-work-expenses/pilot-expenses-go#ato-Medicalexaminations.

[26] Hearing Book, T1, p. 17, Item [4].

[27] See, e.g., the Applicant's response to the audit notification letter dated 15 September 2023 (stating that "I was then able to commence employment with Alliance Airlines on 14th March 2022" and "I worked several part-time jobs in 2021/22 ... before gaining employment again as a pilot ... in March 2022"), Hearing Book, T5, p.132; the Applicant's letter to the Tribunal dated 20 July 2025 (containing the entry with respect to medical expenses, "Mar 2022 - Employment commenced"), Hearing Book, T12, p. 295; and the letter from Alliance's Senior Human Resources Manager dated 18 September 2024, which provides, in relevant part:

"We are writing to confirm the original employment start date for Jason Farley (E190 Training Captain) was due to commence on 28 June 2021.

However, due to issues related with his CASA Medical, his start date was required to be changed as a valid CASA medical certificate is a mandatory requirement for his role as a Pilot. As a result, Jason's official start date with Alliance Airlines commenced on 14 March 2022.

Jason Farley has been employed with Alliance Airlines Pty Limited from 14 March 2022 to current on a full time basis." Hearing Book, T12, p. 297.