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Costs of Self-Education - are the incurred in gaining income?

The architect who took an overseas trip and gained a tax deduction

The teacher who finished his course and gained a pay rise and a tax deduction

The architect who took an overseas trip and gained a tax deduction

Costs of Self-Education - are they incurred in gaining income?

Answer this question….

In Finn's case (CCH Master Tax Guide paras 14-270 and 14-450) an architect, Mr Finn, was employed as an assistant principal architect in a government department. He decided to take extended leave to visit building sites in Europe and America. He had 2 purposes for this

Firstly, he wanted to bring himself up to date with current architectural trends and developments first hand

Secondly, as he was the least senior of all the contenders for the principal architect's position on his imminent retirement, Mr Finn wanted to establish his efficiency and general fitness for promotion to that position.

The department treated the trip as being a distinct advantage to his work and so relevant to one of his projects that he was asked to make a visit to a particular site and report back to them on his findings. An allowance was paid for this additional travel to Mr Finn.

Do you think the expenditure on the trip was incurred in gaining income?

Yes No

The Commissioner thought not... But the High Court held that it was. There were two equally important reasons

Firstly, the court accepted the view that the trip would enhance Mr Finn's efficiency in the eyes of his employer thereby enhancing his chances for promotion to the soon to be vacated job

Just as importantly, it was held that his income producing profession as an architect (like all skilled professions) placed him under an implicit obligation to maintain a progressive acquaintance and keep abreast with developments in architectural thought and practice. If this obligation was complied with by embarking upon an inspection tour of international sites then the cost of the trip was incidental and relevant, and its occasion could be found in the pursuit of the profession, which gave rise to his income.

The decision in Finn's case opened the way for a number of claims, which had previously been resisted by the Commissioner. One of the most litigated claims was that of self-education. The basis upon which these cases were decided rested largely on the establishment of a connection between the outgoing and the production of income

The teacher who finished his course and gained a pay rise and a tax deduction

Refer CCH Master Tax Guide - para 14-450 Mr Hatchett also claimed university fees but in view of the time that would elapse before completion of the course and the remoteness of the possibility that the degree would result in added income, no deduction was allowed

Refer CCH Master Tax Guide - para 14-450

If you can you should read para 14-450 of the CCH Master Tax Guide to revise this area.

In summary, if a connection can be demonstrated between an outgoing and the duties of employment and/or an increase in remuneration then a deduction will be allowed

Think of a continuum with outgoings with a clear connection at one end (allowable) ... … and with outgoings with no such connection at the other end (not allowable) between the 2 extremes the connection gets weaker and weaker

*Connection between outgoin*g and production of income
Mr Hatchett's, teacher's certificate course and an immediate increase in his income		Mr Hatchett's university course - the connection was too remote for the university course so no deduction was allowed
Direct connection used directly in processes	connection less direct - drawn upon indirectly in process	Remote problematic - some vague connection	no connection prerequisite

Tools	books	Newspapers	Child minding

Now apply all of that to the following question

Answer this question….

Mr Wilkinson, an air traffic controller claims the cost of flying lessons on the basis that they will improve his chances of promotion because such experience is viewed as relevant to the duties performed in the course of employment by his employer is a deduction allowable?

Yes No

Refer CCH Master Tax Guide para 14-450 In Wilkinson's case the Commissioner had argued that as the flying lessons could not be deemed to be a

condition of the taxpayer's employment,

their cost was not incurred in gaining income (refer para 14-160, 14-180, 14-450 - CCH Master Tax Guide)

This view had been accepted by board of review members in a similar case (p32 82 ATC 146) and other cases including some instigated by the Commissioner's own employees ... Valuers-case N67 81 ATC 349 Training officer-case P114 82ATC 586

The condition of employment test seems to have had its genesis in comments by Menzies J -(found in Hatchett's case 71 ATC 4184). So what is it? That mere encouragement by an employer would not suffice to make the outgoing allowable.

Comments by Helsham J in White's case (75 ATC 4018-yet another self education case-at 4021) that the outgoings in Hatchett's case were not seen to be part and parcel of the duties of his employment but were allowable only because of the direct effect on income

It seems that in the absence of a direct effect on income the Commissioner was disallowing the claims if incurring the expenditure could not be said to be a condition of employment. As G N Williams J noted in Wilkinson's (83 ATC 4285 at 4303):

While the condition of employment test may be relevant, it will rarely be conclusive in deciding whether outgoings have been incurred in gaining income. The test formulated by Menzies J in Hatchett's case was ... There must be a perceived connection between the outgoing and assessable income