TAXATION APPEALS No. NT87/68-69 AAT No. 4074 Income Tax

Fri 15 Jan 1988

Re: TAXATION APPEALS No. NT87/68-69 AAT No. 4074 Income Tax 

HRNG

SYDNEY
#DATE 15:1:1988

ORDER

  The Tribunal decides that the determinations of the Commissioner upon the
  objections under review are affirmed.

JUDGE1

The Applicant is a lady who is now in her mid-thirties. When she left
school at the age of 16 she undertook secretarial studies for a year and,
in the two years following, served in a secretarial position.   She then
travelled overseas to see the world.   During the next four years she
worked at miscellaneous activities, including selling sets of Encyclopaedia
Britannica and serving on tables.   She earned enough to provide for her
needs.

2.  When she returned to Australia she took a position selling life
assurance with an Australian Life Assurance Office ("LAO").   Her
unchallenged evidence was that LAO provided some instruction as to the
characteristics of the "products" which were to be marketed but no
significant instruction in the art and craft of selling.   She worked from
an office provided by LAO but with limited success.   Her recollection,
unaided by reference to her income tax returns, was that in those early
years she was earning gross commissions of the order of $18,000 gross per
annum (plus or minus $2,000).   Her recollection was faulty.   As
subsequently appeared when copies of her original tax returns for those
years were produced, her gross earnings for the years ended 30 June 1982
and 1983 were $10,603 and $17,966;  and her net earnings from those
activities (as claimed) $9,498 and $7,297. As there was no suggestion made
in the course of the hearing that she was not working diligently in those
periods, I find that the earnings that I have referred to were the product
of her "full-time" endeavours.

3.  By early 1983 she was finding frustrations in her position.   She was
not being as successful as she would have wished.   Her income level was
disappointing.   That disappointment was made worse by the irregularity in
receipt of that income and by the circumstance that tax deductions were
being made by LAO based upon expectations - which were quite false - that
in high pay periods the amount earned reflected an earning rate typical for
the year.  She attributed much of her lack of success to two
considerations.   One was ineffective salesmanship on her part.   The other
was said to be a prohibition imposed by LAO which prevented her from using
the services of sub-agents: persons who, for reward, would arrange to
introduce her to possible "customers".   As her evidence on the latter
point was not challenged, I accept it in so far as it is consistent with
other evidence.   She further claimed that LAO would only permit her to
utilize sub-agents if she conducted her business in partnership or through
a body corporate.   Why that should have been so was not explained.
Whatever the full position as to that may be, in fact she formed a
partnership with a mutual friend on 15 September 1983.   He made no
contribution of any significance to the partnership and it is sufficient to
say that the terms of the partnership were that she had a 99% interest and
he the remaining 1%.   From that point, sub-agents were used more
extensively than previously.   Further, LAO ceased deducting tax from
commissions paid in relation to her work.

4.  Neither the Applicant nor the Respondent sought to establish precisely
when and to what extent entitlements to increased commissions commenced;
or the timing or measure of the flow of commissions which followed.
Neither called on LAO to produce its records.   The only evidence presented
is that appearing in the tax returns which shows that she received salary
up to 15 September 1983 and that otherwise all commissions were derived by
the partnership.

5.  The figures so provided show the following:-

         SALARY
         From 1 July 1981 to 30 June 1982           $10,603
         From 1 July 1982 to 30 June 1983           $17,966
         From 1 July 1983 to 15 September 1983      $33,258
         PARTNERSHIP COMMISSIONS
         From 15 September 1983 to 30 June 1984     $83,329
         From 1 July 1984 to 30 June 1985           $90,160
         From 1 July 1985 to 30 June 1986           $56,357

6.  Why commissions should have fallen substantially in the latter year was
not explained.   Nor was any explanation offered as to why or when she
terminated her career as a life assurance saleswoman.   I am satisfied that
entitlement to commissions flowed from the completion of proposals by
applicants which proposals came to be accepted in due course by LAO; and
that, upon or following acceptance by LAO, those proposals led to payment
of commissions to the Applicant or her partnership and, then or later, to
the payment of remuneration to sub-agents. Having regard to the earnings
derived in the periods identified above, I am satisfied that a substantial
increase in earning rate commenced with sales which were negotiated
significantly before 30 June 1983;  with sales which generated some of the
assessable income of the year ended 30 June 1984.

7.  In July 1983 there was another material development. The Applicant
purchased some exercise equipment from a man described as an "executive"
- whatever that may mean - employed by a well-known international company.
The evidence was that he sold exercise equipment in his spare time.   The
Applicant was impressed by the ease and effectiveness of his communication
and salesmanship.   Believing that her own potential as a saleswoman was
inhibited by her lack of skills in that regard, she enquired how he had
developed the skills he had demonstrated in selling to her.   His answer
was that he had studied courses presented by the Church of Scientology.

8.  With the intention of learning more, the Applicant attended at the
premises of the Church of Scientology and, in due course, enrolled in a
course of study.   That course was to be followed by others.   The evidence
as to what preceded enrolment was scant but the first in time of the
receipts presented in evidence suggests that she paid $10 in order to be
assessed as a prospective student.   It may be that that was the first
exercise in salesmanship:  suggesting that only what is paid for is of
value to the payer, even if it is more valuable to the payee than the
payer.

9.  Be that as it may, the $10 was not the last amount to be paid by the
Applicant.   Before the year of income ended, she had paid in all $30,446
to the Church of Scientology by way of course fees.   She paid a further
$19,579 in the following year.   She claims income tax deductions for the
amounts expended.   In addition, in December 1983 she paid $3,622 for
books, in respect of which she was to claim depreciation.   The claim for
depreciation of $268 in the 1985 year was disallowed and that too is an
issue for determination.   If it is true that what is more expensive is the
more valuable, she was entitled to expect great things.   She enrolled in
and studied thirteen of the many courses offered by the Church.   When she
embarked on the courses she did so with enthusiasm.   Her unchallenged
evidence was that she often participated in programmed activities for
thirty hours a week.   Further, she did so while developing her rapidly
expanding and increasingly successful business.   The available evidence as
to what she studied will be considered later.   At this point it is
appropriate to consider the significance of the fact that the payments were
made to the Church of Scientology and to make some general observations as
to the presentation of the case.

10.  Once the hearing of these references commenced, it quickly became
clear that the Applicant and her solicitor, who at that stage appeared for
her, were presenting an overly simple view of the issues.   It seems to
have been thought that her claims as to the courses of study related to two
items of expenditure:  $30,446 in one year and $19,579 in the year
following.  It also seems that it was intended that the presentation of her
claim was to be based on generalizations that she incurred expense in
studying;  that the studying led to increased assessable income;  and that,
therefore, the expenses of study were deductible.   At that point I
adjourned the matter to enable her claim to be presented so as to enable
her to establish the cost and content of each of the courses of study
undertaken with a view to establishing entitlement under each head.   Upon
the resumption of the hearing Counsel appeared and was granted leave to
thereafter represent the Applicant.

11.  It also seems that the Commissioner's officers also took too simple a
view of the matter.   That was particularly exemplified by the
cross-examination of the witnesses for the Applicant and in the course of
the closing address.   The Commissioner's representative, in the course of
closing argument, sought to argue that the Applicant was not entitled to
the deductions claimed in respect of course fees and depreciation because
of the identity of the Church of Scientology and of the principles it
professed.   I was referred (orally only) to extracts from the
Encyclopaedia Britannica and to the findings of fact said to have been made
in relation to Scientology and the Church of the New Faith in the decisions
of the Supreme Court of Victoria in Church of the New Faith v. Commissioner
of Payroll Tax (Vict.) 80 ATC 4667; (ibid) 82 ATC 4198;  and of the High
Court of Australia (ibid) 83 ATC 4652.  I reject the submissions as
irrelevant.   The case is not about the merits of Scientology or the Church
of Scientology or of the Church of the New Faith.  It is about the claim of
the Applicant to income tax deductions arising out of payments made by her,
albeit to the Church of Scientology.   In addition, in so far as those
reports record findings of fact, they merely record the findings of fact
made by those Courts on other occasions and in the course of other
litigation between other persons.   Further, the references to those
decisions were not presented in the course of evidence so as to provide the
Applicant with an opportunity to test the evidence.

12.  I am firmly of the view that the entitlement of the Applicant to the
deductions claimed is not to be determined by reference to either the
identity or characteristics of the entity presenting the course.   Her
entitlement would be no more or less if the courses in which she enrolled
had been presented by a University (whether public or, having regard to the
fees paid, private);  or by a major professional body, such as the
Australian Medical Association;  or by a prominent professional firm, such
as some of the more entrepreneurial firms within the profession of
accounting.   What lies at the heart of the matter is not the social
acceptability of the Church of Scientology but rather questions as to the
relationship between the expenditure incurred by this lady and the
derivation of her assessable income; and the character of the courses
undertaken by her.

13.  I am satisfied that, when the Applicant enrolled in her first course,
one objective at least was to increase her income-earning capacity.   I am
persuaded that, as she continued her studies, her assessable income - as
derived through the partnership - increased;  and that the increases
secured were wholly attributable to her success in organizing, through
sub-agents, opportunities to sell;  and then in selling.

14.  I accept that her studies contributed to her personal development in
ways which gave her a greater self-confidence, which was attended by
greater ease and greater effectiveness in the arts of communication.   Her
demeanour in the witness box demonstrated that.   However, I am not
persuaded that the increases in assessable income were a consequence only
of her newly developed talents.   The increases in assessable income, on
the evidence before me, quite clearly commenced in a substantial way before
any of the courses commenced.

15.  But the question to be determined under s.51 of the Income Tax
Assessment Act 1936 ("the Act") is not dependent upon establishing that
increased income was a direct consequence of the expenditure or wholly
attributable to the courses.   The costs of an advertising company are not
deductible only when it is successful.   The significance of evidence which
establishes that an increased income flows as a direct consequence of
expenditure and from no other cause is that it makes it easier to be
satisfied that the expenditure was incurred "in the course of" the
derivation of, not an increased level of assessable income, but of "the
assessable income" of the Applicant.

16.  That being so, one matter of critical importance is to assess the
nature and content of each course studied.   The courses undertaken by the
Applicant were not such that their content could be as readily or easily
appreciated as the content of more conventional courses presented by more
familiar institutions.   The material presented in evidence indicated that
the Church has its own vocabulary and "jargon".   That in itself is not
surprising.  Each discipline has its own vocabulary and "jargon".

17.  I was presented with evidence from two witnesses as to course content.
The first witness was the Applicant.   The second was a member of the
full-time staff of the Church who had been a full-time officer of the
Church for ten years.   I will present my findings by reference to the
evidence-in-chief given by him.   References which appear to fees are to
the fees which I accept as having to have been paid in relation to each
course.

1.  Course 1 - $399.71 - 12 August 1983 - HQS (Hubbard Qualified
    Scientologist):   An intermediate course in the basics of
    Scientology, dealing in analyses of the mind;  of how and why
    people act;  of communication practices;  and the application
    of those practices;
2.  Course 2 - $1,000 - 26 August 1983 - Professional Training
    Routines:  A more advanced course dealing with
    communications;  a development from that aspect of Course 1;
3.  Course 3 - $10,000 - 6  October 1983 - Saint Hill Special
    Briefing Course:  A yet more advanced course.   So described
    because it was first taught by Mr. Hubbard at Saint Hill in
    the United Kingdom.   A course directed to helping persons to
    be more effective but involving more than "self-development";
4.  Course 4 - $6,000 - 7 March 1984 - Staff Status 1:  A course
    in administrative and business practices, particularly
    applying to activities within the Church but appropriate for
    use in other circumstances unrelated to the Church;
5.  Course 5 - $2,000 - 4 April 1984 - Staff Status 2:  A more
    detailed and expanded course in the same area as Course 4;
6.  Course 6 - $592.74 - 5 April 1984 - Executive Studies 1:  A
    course in administrative procedures for executives
    responsible for managing and directing subordinates;
7.  Course 7 - $3,835 - Executive Director Full Hat:  A course
    bringing together all practices and procedures appropriate to
    persons having the responsibility of an Executive Director.
    (The reference to a "Hat" is a term used to indicate status
    or function).
8.  Course 8 - $2,620 - 11 May 1984 - OT Preps. Eligibility, Solo 
    I. II.;
9.  Course 9 - $2,000 - 29 June 1984 - OT 1, II, III:
    (The staff member did not claim detailed familiarity with
    these two courses as he had not undertaken them).   They were
    described as advanced level OT courses.   OT is defined as:-
         "1.  Operating Thetan, highest state there is;
          2.  a being at cause (sic) over matter, energy, space,
              time, form and life."
         OT Levels are defined as:-
         "the numbered steps on the Grade Chart above Clear which
         are done in order on a being's gradient rise toward full
         OT ability, regenerated and developed by L.Ron Hubbard."
         "Clear" is defined as:-
         "an unaberrated person.   He is rational in that he
         forms the best possible solutions he can on the data he
         has and from his viewpoint.   It is a state of mental
         well-being never before achieved by man".
10. Course 10 - $15,000 - False Purpose Rundown Auditing:  a
    course of counselling conducted with an appointed counsellor
    who assists the pupil to advance towards self-recognition in
    a series of "one-to-one" sessions.   The course was described
    in promotional brochures produced by the Applicant as
    follows:-
         "This is a most exciting action to run.   It blows off
         the things that stop a thetan, and make him hold back.
         It unsticks him from major confusions.   It puts the
         person at cause so he doesn't have to do things that are
         not survival, and handles specific case factors that
         would keep him from going up The Bridge.   It is
         specifically designed to help a stalled Dianetics Clear.
         In all cases, it restores reach and greatly increases
         the expansion potential of a being."
11. Course 11 - $845 - Tapes (money tapes):  a series of taped
    lectures on money and financial and economic systems.
12. Course 12 - $322 - Books (Management Series):  a management
    series of books on aspects of management and administration
    authored by L.Ron Hubbard.
13. Course 13 - $2,918 - Auditing:  a further course of
    self-improvement;  also conducted on a "one-to-one" basis
    with a counsellor.

18.  The staff member's evidence was - and I accept it - that enrolment in
and completion of the courses does not always indicate an ambition to
advance within the Church.   His contention was that many business people
use the courses for purposes unrelated to the Church.

19.  It is difficult to come to a clear understanding of the nature,
purpose and content of the courses.   The Applicant sought to rest her case
on generalizations that she had participated in the courses with a view to
increasing her income; and that her participation in the courses had had
that effect. Such generalizations might or might not be sufficient to
persuade.

20.  However, if a challenge to those assertions by way of
cross-examination was to be successful, particularly having regard to the
obvious skills that the Applicant has as an experienced and skilled
communicator and persuader, it called for a cross-examination based upon
detailed instructions as to the subject matter of the cross-examination;
mastery of that material;  and skill in the art of cross-examination.   The
conduct of such a cross-examination was not reasonably to be expected from
officers of the Commissioner who are not thoroughly instructed and are not
well-experienced and skilled advocates.

21.  However, before it is necessary for a case to be shown to be unsound
by cross-examination, it is first necessary that an applicant should set up
a case which, but for such a cross-examination, would persuade.

22.  In my view, the case of the Applicant fails by that test.   The
Applicant has to persuade me that each of the courses undertaken was such
that it could fairly be described as having been undertaken "in the course
of" deriving assessable income; and as not being "private" in character
such as would cause the expense not to be allowable pursuant to the
provisions of s.51(1) of the Act.

23.  The factors which distinguish learning-experiences which fall in the
former category from those which fall in the latter category are not easily
or precisely defined.   Of expenses in the former category incurred by a
senior employed architect who travelled overseas to study developments in
architecture, the High Court of Australia said in Commissioner of Taxation
v.  Finn (1961) 106 CLR 60:-

         "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."  (Dixon, C.J. at pp.68-69);

         "(The) professional status (of the office of the
         applicant) 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 concern his Government."   (Kitto, J. at pp.69-70);

         "Generally speaking, it seems to me, a taxpayer who
         gains income by the exercise of his skill in some
         professional calling and who incurs expenses in
         maintaining or increasing his learning, knowledge,
         experience and ability in that professional calling
         necessarily incurs those expenses in carrying on his
         profession or calling."   (Windeyer, J. at p.70).
         The claims were allowed.

24.  On the other hand, when Menzies, J. in the High Court of Australia
considered the claim of a school teacher seeking a deduction for
expenses
incurred in studying for an undergraduate degree (F.C. of T. v. Hatchett
(1971) 125 CLR 494), he disallowed the claim, saying at (p.499):-

         "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;....."

25.  The Applicant says that her calling was that of a "saleswoman".  Her
claim is that studying the art of communication was just as much relevant
to her income-earning activities as was any study she might have undertaken
as to the "products" she was selling.

26.  However, despite those contentions I am persuaded by the evidence
before me that the courses undertaken were principally directed to the
personal development of the individual and of her capacities and that none
of the courses should be characterized as she wished.   On balance I accept
that she was not seeking growth in spiritual life, such as might have been
sought by a disciple of any major religion either for its or her own sake.
I am persuaded, on the balance of probabilities, that her principal
objective was to increase her wealth by increasing her income.   She gave
evidence that her ambition had been to earn $100,000 in a year.   I accept
that, at one point at least during her studies, she came to have that
ambition for herself although why she abandoned it or failed to achieve it
- as it seems must have happened - was not explained.   Even so, as I have
understood the evidence presented before me, the courses were directed to
providing the Applicant with a sound perception of herself and of her
relationships to everyone and everything in creation.   It was expected
that, if she could succeed in that, then she would be able to more
effectively communicate with others and then she would also have a capacity
to persuade others to follow courses proposed by her.

27.  In the course of argument, reference was made by way of analogy to
courses in advocacy undertaken by practising barristers.   But the
differences are many.   Such courses in advocacy - the art of persuasion -
do not call for such a commitment in time over so prolonged a period.  They
certainly do not cost so much, particularly as the teachers are honoured by
the office rather than rewarded financially.   Further, barristers practice
their craft under the control of experienced advocates according to strict
standards of fairness and in open confrontation with their rivals.   In
particular, they seek to persuade an informed audience.  But the essential
difference for present purposes is that such courses in advocacy do not
seek to present to candidates a total view of life.   Such serious and
fundamental matters are left to others who claim to be better qualified.

28.  Self-knowledge and the recognition of one's place in the order of
creation have at all times and in all places been propounded as essential
to success in life, however that success might be measured.   In my
judgment the courses here under consideration were conducted at that level
and were so closely and deeply involved with the individual person that, in
my view, they must be characterized as "private".   In Case U189 (87 A.T.C.
1082) I had to consider the much less personal claim of a medical
practitioner who suffered such disabilities in oral communication under
examination conditions that, over a number of years, he had failed the oral
examinations prerequisite to specialist status.   He took drama lessons and
incurred expense in doing so.  Having done so, he immediately succeeded in
his oral examinations.   I refused his claim to a deduction and in doing so
said:-

         "... I am not persuaded that the expense incurred by
         this Applicant was not 'private' in nature.   The
         difficulties experienced by the Applicant were highly
         personal in nature.   They were not a function of his
         professional skill and capacity, but rather personality
         characteristics which impacted on his professional life.
         In this instance, they affected it adversely.   In my
         view, the expenses incurred in relation to drama lessons
         were private in character and are not deductible."
         In my view, the same conclusion must be reached in this
         case.

29.  In reaching that conclusion I have had regard to the evidence, such as
it is, which is before me in relation to each of the courses.   I have
referred earlier in these reasons to the inadequacy of "generalizations"
both as to the character and characteristics of Scientology and to the
nature of the courses undertaken.   The question to be addressed in each
year is not whether the Applicant is entitled to a deduction for the entire
sum claimed but rather whether, in relation to the amount expended upon
each course, a deduction is allowable.   My finding is that there is
nothing in the evidence before me which persuades me that the cost of any
of the courses studied is allowable as a deduction, and accordingly, the
claims to deduct the total cost of those courses fail in their entirety.

30.  As to depreciation, it was submitted for the Applicant that, there
being no cross-examination touching the evidence given in chief as to that
claim, the claim should be allowed. However that, in my view, is a non
sequitur.   In the circumstances of this case, having regard to the fact
that there was no cross-examination on the point, I accept the evidence
which was given by the Applicant.   But the evidence so given does not
persuade me that the Applicant is entitled to the deduction she seeks.   I
cannot identify the contents of her library by reference to title, author
or content.   In all the circumstances, the mere generalization that it is
a library of books relevant to her income-earning activities is not enough.

31.  The determinations of the Commissioner upon the objections under
review will be affirmed.