Commissioner of Taxation v Anstis [2010] HCATrans 183 (29 July 2010)

Last Updated: 29 July 2010

[2010] HCATrans 183

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
Melbourne No M64 of 2010

B e t w e e n -

COMMISSIONER OF TAXATION

Appellant

and

SYMONE ANSTIS

Respondent

FRENCH CJ
GUMMOW J
HEYDON J
KIEFEL J
BELL J

TRANSCRIPT OF PROCEEDINGS

AT CANBERRA ON THURSDAY, 29 JULY 2010, AT 10.02 AM

Copyright in the High Court of Australia

MR S.J. GAGELER, SC, Solicitor-General of the Commonwealth of Australia: If the Court pleases, I appear with MR S.H. STEWARD, SC and MS L.A. HESPE for the appellant. (instructed by Gadens Lawyers)

MR M.L. ANSTIS: If the Court pleases, I appear for the respondent. (instructed by Mr Michael Anstis)

FRENCH CJ: Yes, Mr Solicitor.

MR GAGELER: Your Honours, this is a short case in a field that has been the subject of intense scrutiny by the Court in recent years. Without any preamble, can I take your Honours immediately to the relevant provisions of the Social Security Act and the Social Security (Administration) Act. I confess that I do not know exactly what form your Honours have those documents in.

HEYDON J: Mr Gageler, my infirmity is catching up with me. It is very hard to hear what you are saying.

MR GAGELER: I will speak up, your Honour. I am taking your Honours to the Social Security Act and the Social Security (Administration) Act ideally in the compilation as at 24 May 2006. If your Honours do not have it precisely in that form it probably does not matter. Within the Social Security Act youth allowance is dealt with in Part 2.11, relevantly at page 154 and following. The starting point is section 540 which provides that:

Subject to this Subdivision –

and there are many provisions in the subdivision that deal with disqualification –

a person is qualified for a youth allowance in respect of a period if –

relevantly (a) –

(i) throughout the period the person satisfies the activity test . . .

(b) throughout the period the person is of youth allowance age -

that is, basically aged between 16 and 25, depending on the precise circumstances, and:

(d) throughout the period, the person:

(i) is an Australian resident –

relevantly.

FRENCH CJ: So far as the activity test is concerned, what we are looking at is a continuing condition of entitlement by reference to the fulltime study requirement.

MR GAGELER: That is right. So the activity test is then in section 541. Again, subject to exceptions, this is subsection (1):

a person satisfies the activity test in respect of a period if:

(a) the person satisfies the Secretary that, throughout the period, the person is undertaking full-time study –

Section 541B then provides:

For the purposes of this Act, a person is undertaking full-time study if:

(a) the person:

• (i) is enrolled in a course of education at an educational institution . . .
  

(b) the person:

(i) is undertaking in the particular study period . . . for which he or she is enrolled for the course . . .

(iii) . . . at least three-quarters of the normal amount of full-time study in respect of the course for that period –

One goes to section 541B(3) to see that for that purpose:

the normal amount of full-time study in respect of a course is an average, taken over the duration of the period for which the person in question is enrolled in the course, of 20 contact hours per week.

Going back to section 541B(1) (c):

the course in question is an approved course of education or study -

that is, approved in accordance with section 541B(5) and in the Secretary’s opinion, the person is making satisfactory progress towards completing the course. That opinion is informed in accordance with section 541B(3A) by guidelines set out in a ministerial determination made in accordance with section 541B(3B). Your Honours have the relevant ministerial determination separately. It is adequately extracted in any event in the judgments. Your Honours should look within the ministerial determination to the definition of “long course” and “standard minimum length” from clause 1.4 and to the operative provision, clause 2.1.

FRENCH CJ: To perhaps state the obvious, there are a number of ways of qualifying for the youth allowance and you have taken us to those provisions relevant to the way in which the respondent qualifies.

MR GAGELER: Indeed, your Honour. So it is, and always has been, common ground in the case that the amounts claimed as deductions by the respondent – they are set out at page 69 of the appeal book – were amounts that were expended by her in the course of undertaking fulltime study in a manner which met those requirements of section 541B(1) that I have taken your Honours to.

Now, the rate of youth allowance which results, in some cases, from meeting those qualifications and taking certain other steps is governed by Division 5 of Part 2.11, beginning at page 216 if your Honours are working from the print at the relevant date. The section at the commencement of that division is section 556(1) which says that, again subject to certain qualifications, the rate of a person’s youth allowance is to be worked out in accordance with what is described as a “Youth Allowance Rate Calculator”. In section 1067G - - -

FRENCH CJ: This is the plain English - - -

MR GAGELER: That is right.

FRENCH CJ: - - - guide to the math.

MR GAGELER: Exactly. That section, in the same print, is at page 207, which in subsection (1) repeats for our edification what we have already read in section 556(1), and your Honours will see 1067G is a very long section which begins with section 1067G-A1, setting out the basic steps that are involved in the calculation of the rate. The detail of that is certainly not something I want to take your Honours to, but the basic concepts are relevant to issues in the case. What you see is that the method of calculation involves starting with what is described as a “basic rate”, the rating “Module B”, the basic rate being taken from one of three tables – table BA, table BB or table BC and what you have there, clearly enough, is a basic living allowance. What is added, where applicable, is then a pharmaceutical allowance that you see from table C, and there are then certain reductions to be made which become quite complex.

FRENCH CJ: But importantly to your submissions in relation to periodicity it is characterised as a calculation of a fortnightly rate from which you assess a daily rate.

MR GAGELER: Yes. What I am really getting from that is you start – what you are getting is a means-tested living allowance with certain additions and certain reductions. That is what I am getting from this, your Honour. So, what you will see, without going through the detail, is that there are reductions by reference to parental income; there are reductions by reference to family means; there are further reductions by reference to what is described as the ordinary income; that is income from other sources of the recipient or of a person living with the recipient. The relevant section there is section 1067G-H1. “Ordinary income” is defined in section 8(1) essentially as a very broad range of receipts from non-social security sources. One adds, where applicable, a remote area allowance, which is something provided for in section 1067G-K1. Of course none of the detail of that particularly matters but the nature of the payment, if made, is significantly affected by the provisions that govern the calculation of the rate.

There are definitions in section 23 of the 1991 Act that then feed into the Administration Act that I am about to take your Honours to. There is a definition in section 23(1) at page 167 of “social security benefit” which includes youth allowance and over the page of “social security payment”, which includes a social security benefit.

If your Honours then move to the Social Security (Administration) Act you will see in section 3 some definitions and references to definitions. Relevantly in subsection (2) the definitions in the 1991 Social Security Act are brought in. Your Honours might also note subsection (4).

HEYDON J: I think I am not completely with your argument. Are you talking about the Social Security (Administration) Act 1999?

MR GAGELER: I am, your Honour.

HEYDON J: You took us to section 3 and then you took us to section 3(4).

MR GAGELER: Yes.

HEYDON J: What you said about section 3 does not correspond with what I have in front of me, and there is no subsection (4). Where have I gone wrong?

MR GAGELER: I am sorry, your Honour. I should have taken your Honour to subsection (3).

HEYDON J: It begins “If (a) a person makes a claim for a senior’s health card - - -

MR GAGELER: The Social Security (Administration) Act as at 24 May 2006.

HEYDON J: What is your subsection (3) again? What are the opening words?

MR GAGELER: Section 3 deals with interpretation. Subsection (3)?

HEYDON J: “A reference in this Act”?

MR GAGELER: “A reference in this Act”, yes, I am sorry, your Honour. I did not think I was going to be hitting controversial territory at this stage, your Honour. Section 11 states the general rule that:

a person who wants to be granted:

(a) a social security payment

. . .

must make a claim –

Section 16 deals with the manner of making a claim. Section 36 obliges the Secretary to determine a claim, and section 37 provides that:

the Secretary must determine that a claim for a social security payment is to be granted if the Secretary is satisfied that:

(a) the claimant is qualified for the social security payment; and

(b) the social security payment is payable

Section 41, which is extracted in one of the judgments below, then deals with the commencement of payment. Section 41 needs to be read with section 42 and with Schedule 2. The result of all that is that usually the starting day for the payment will be the day that the claim is made, but not in every case. One then goes finally to section 43 which says that:

A social security periodic payment is to be paid:

(a) in arrears; and

(b) by instalments relating to such periods (not exceeding 14 days) as the Secretary determines.

GUMMOW J: This expression the “social security periodic payment”, is that defined anywhere? It is the first time we see this word “periodic”.

MR GAGELER: I think the answer to that is no, but if your Honour will just - - -

GUMMOW J: I mean, it suggests that there are some social security payments which are not periodic.

MR GAGELER: There are certainly many one-off payments, but it is not defined in the Social Security Act and I was just checking, your Honour, whether it is one of the definitions within this Act itself.

FRENCH CJ: Is there some provision for emergency payments?

MR GAGELER: Many, your Honour. Yes, your Honour, within the Schedule, that is the dictionary, there is a definition of “social security periodic payment”. It is at page 216 of the print if your Honours have it.

GUMMOW J: Page?

MR GAGELER: Page 216. Relevantly, it includes a social security benefit. Your Honour will recall that youth allowance comes within that description.

GUMMOW J: Yes, we saw that.

MR GAGELER: So, as I said, what I get from that is that youth allowance can be properly seen as a periodic payment of a means-tested living allowance which is granted on application, pursuant to statute, upon the Secretary being satisfied that the applicant is qualified for the grant, “grant” being the statutory term, and qualification for the grant involves meeting the criteria in section 540 of the Social Security Act and not being otherwise disqualified by provisions of the Social Security Act.

GUMMOW J: Now, we do not have to decide this, I suppose, but what is the taxation character of a non-periodic social security payment? Is the practice for them to be taxed as income or not, do you know?

MR GAGELER: I do not know. I certainly cannot give your Honour an immediate answer and there may be no global answer but I will inquire. Within the 1997 Act one, of course, starts with section 4-15 and goes immediately and critically, for the purposes of this case - if your Honours are looking at the CCH version printed for 2007, section 4-15 is at page 422, subsection (1), and one goes immediately for present purposes to section 6-5 at page 425, subsection (1) - a familiar provision - and subsection (2) and to section 8-1 at page 428, section 8-1(1)(a) and 8-1(2)(b).

Part of the context of those provisions and particularly part of the context of section 6-5(1) which deals with ordinary income is to note the exemptions that are provided in other provisions of the Act. One starts there with section 6-20(1) at page 427. So the starting point is that section 6-5(1) defines “ordinary income” to include “income according to ordinary concepts”. Section 6-20(1) then says:

An amount of ordinary income or statutory income is exempt income if it is made exempt from income tax by a provision of this Act –

Section 51-1 at page 895 then says:

The amounts of ordinary income and statutory income covered by the following tables are exempt from income tax. In some cases, the exemption is subject to exceptions or special conditions, or both.

What one notes in the language of section 51-1 is that there is a statutory assumption that what is set out in the table is an amount of ordinary income and would remain so if it were not exempted. Within the table the relevant item is item 2.1A at page 897 which is applicable to “a full-time student” and refers to an amount which is made exempt, described as:

a scholarship, bursary, educational allowance or educational assistance –

but there is an exception which is then referred to as being the exception in section 51-35. That section appears at page 901. Section 51-35 says:

The following payments made to or on behalf of a full-time student at a school, college or university are not exempt from income tax under item 2.1A –

The relevant paragraph is (b):

a Commonwealth education or training payment –

That expression is defined in section 52-145(1) which appears at page 942. Your Honours will see that the expression is defined in subsection (1)(b)(iv) to include a payment by way of “youth allowance”.

FRENCH CJ: You do not say that amounts to a statutory deeming of youth allowance as income? You say it operates on the assumption that it is.

MR GAGELER: Deeming is too strong a word. I will refer to Dunmunkle in due course, your Honour. Deeming is too strong a word but a coherent construction of the Act where one has an inherently elastic concept that is income according to ordinary concepts using its denotation informed by a statutory assumption that a particular category of income falls within that conception, yes.

FRENCH CJ: That was a common assumption on which this case was conducted below?

MR GAGELER: I hear yes, but I cannot give your Honour that assurance.

FRENCH CJ: That is my impression.

MR GAGELER: Yes. So the result of that is that on the assumption, on the statutory assumption, the assumption made by the Parliament, that youth allowance is income according to ordinary concepts. There is first an exemption and then there is an exception from the exemption to bring it back within income according to ordinary concepts. Now, that form of exemption, that is, the exemption and then the inclusion from the exemption in respect of certain Commonwealth payments made by way of assistance to students, is a continuation of the position that had existed under the 1936 Act in an exemption that was provided for in section 23(z).

We have collected the legislative history of section 23(z) and we will provide it to your Honours. The detail does not particularly matter, but it does form the background to the exemptions that I have taken your Honours to, recognising that the 1997 Act is a re-write of the 1936 Act and it also helps explain at least one of the cases I will take your Honours to, which is the case of Ranson. I will not take your Honours through the detail of this, but can I say this. The exemption in section 23(z) – this is the exemption without the exception at this stage – was introduced in 1951 and it was introduced as a consequence of the Parliament’s acceptance of recommendations contained within a report of a committee chaired by Mr Spooner – the Spooner Committee Report.

The assumption upon which the recommendation was made and accepted is the assumption that you see in paragraph 2 of that report, which is the first of the documents that we have provided your Honours with, and that is that the starting point was an understanding that periodical cash payments under scholarships, fellowships and similar awards, fall within the general meaning of the word “income” and it was on that basis that an exemption was recommended.

In 1985, an exception to that exemption was introduced, the exception then being applicable to tertiary education assistance, TEAS, as it was known. Your Honours will see the 1985 amendment provisions in this bundle and also an extract from the explanatory memorandum. If your Honours were to locate page 23 of that extract, it has got a page numbered 535 at the bottom, what one sees in the first paragraph and in the third paragraph was a policy intention to make tertiary education assistance subject to income tax.

That policy was then continued in 1986 when tertiary education assistance was replaced by a scheme called Austudy and the same intention was then continued when Austudy was itself replaced by youth allowance in 1998. One sees an explanation of that intention on the third-last page of the bundle that I have handed to your Honours, the page numbered 180 in the middle. If I can go to the first of the issues in the case, that is the characterisation of youth allowance as income, and I say it is an issue in the case, that characterisation was common ground in the Tribunal and common ground at both stages of the Federal Court. It is questioned by the respondent in the respondent’s written submissions and we make no objection to that issue being raised before the Court.

The resolution of the issue, of course, turns ultimately on whether youth allowance is properly characterised as income according to ordinary concepts, which is the language of section 6-5(1), or as income in accordance with the concepts and usages of mankind, which is the paraphrase that was endorsed in Stone and Spriggs. It, of course, turns on the character of youth allowance in the hands of the recipient having regard to the totality of the circumstances, critically in this case, those circumstances being the statutory criteria for payment and receipt under the Social Security Act and the Social Security (Administration) Act.

GUMMOW J: If the student satisfies the criteria, the Commonwealth is obliged to provide the benefit.

MR GAGELER: That is right, yes.

GUMMOW J: We had a similar sort of situation in Pape, you will remember, with the bonus that was being paid.

MR GAGELER: Yes.

GUMMOW J: It seemed to be that the right was conferred, by the operation of the legislation, on the recipient.

MR GAGELER: Yes, of course, the right is to make an application, the duty of the Secretary is to make a determination and the grant follows from the determination.

GUMMOW J: If that determination is made, it must follow.

FRENCH CJ: The statutory right would be located in the Administration Act, would it? I think the term “payable” is used there.

MR GAGELER: Yes. I have taken your Honours to that. Section 11 allows for the making of the claim, section 16 the form of the claim, section 36 obliges the Secretary then to determine the claim and section 37, I think, is the provision that provides for a grant to be made if the Secretary is satisfied.

GUMMOW J: Section 37, was it?

MR GAGELER: Yes, 37 and then the payment, your Honours will recall section 43, so far as the - - -

GUMMOW J: Yes, is to be paid.

MR GAGELER: Yes, so it is a statutory entitlement which follows from the determination by the Secretary that the person is qualified.

FRENCH CJ: And 41 becomes payable to a person - - -

MR GAGELER: Yes, 41 is –

FRENCH CJ: It tells you when it starts, I think.

MR GAGELER: Directed to the starting point, yes, your Honour.

KIEFEL J: But the allowance can be ceased, for instance, if the activity test is not complied with throughout the period?

MR GAGELER: Yes.

KIEFEL J: Is there any provision in the Administration Act that takes up the failure to satisfy the activity test or which has regard to cessation of payment?

MR GAGELER: There are numerous provisions that deal with cancellation and variation. If your Honour would allow me to take that on notice I will try to locate the precise provision.

FRENCH CJ: That would be a loss of qualification in terms of the provisions of the Act itself.

MR GAGELER: Yes, that is right.

KIEFEL J: But the importance of the activity test for the purpose of the argument is that it is an ongoing requirement.

MR GAGELER: Yes.

KIEFEL J: So that you are qualifying from day to day, or you are maintaining your qualification from day to day.

MR GAGELER: That would be the better way of putting it, yes, from day to day. So, your Honours will have seen our written submissions. What we point to as being, in this case, and we would not wish to lay down any universal proposition but in this case the two factors that are sufficient to characterise the payment as income according to ordinary concepts are its periodical nature and the amount which is calculated and objectively intended, certainly intended by the Parliament to be relied upon for ordinary living expenses.

That is sufficient to bring the case within Professor Parsons’ principle 11, to which we have referred in our written submissions, and it is a principle which is illustrated by a number of cases. We have collected the principal ones in footnote 2 of our submissions - Dixon, Harris and Ranson. There is, in addition, one might note, the case of Kiely to which the respondent usefully refers, that is Kiely v Commissioner of Taxation 32 SASR 494 - I do not take your Honours to it - Justice White determining in 1983 that a pension paid pursuant to the Social Security Act was assessable income within the meaning of section 25 of the 1936 Act and expressing surprise that the precise question had not come up before.

Your Honours, of those cases, the only one that I wanted to take your Honours to was Ranson [1989] FCA 491; 25 FCR 57, the decision of the Full Court of the Federal Court, which was a case which concerned the construction of section 23(z) and an aspect of section 23(z) that is not currently relevant. It is the general discussion that appears at pages 64 and 65 that I wanted to take your Honours to. At page 64, about the middle of the page, in the paragraph that commences with a reference to section 23(z), it is said in the second sentence:

It may be possible to conceive of an educational allowance, paid in a lump sum or even periodically as being in a particular case a mere gift and accordingly as not having the character of income in ordinary concepts. Generally, however, a scholarship or bursary will be income because it consists of a series of periodical receipts.

There is then a reference to Dixon and there is then a reference to the work by Professor Parsons that we have separately referred to in our submissions. There is a reference over the page at page 65 to the provenance of section 23(z) – I have already taken your Honours to it. But it is the principle that is attributed or certainly stated by Professor Parsons in his work, and attributed to Professor Parsons at the bottom of page 64 and to the top of page 65 which, in our submission, is directly applicable and sufficient to characterise the current receipts as income.

We are conscious that there is some discussion of Dixon in Stone’s Case, at paragraphs 65 to 66 in Stone [2005] HCA 10; 222 CLR 241. What we take from that is that one should not be categorical and it will be the case that not every periodical payment of a living allowance will be income. I accept that when I give my son pocket money to attend university it is not – at least I sincerely hope – it is not income in his hands.

KIEFEL J: The periodical nature of the payment you refer to as giving the quality or character of income, but you do not use that in any other way with respect to the argument on the core issues.

MR GAGELER: Yes, I do. I turn it to my advantage. It is the periodical nature of the payment combined with it being a payment of a living amount.

KIEFEL J: That is what I wanted to ask you. In relation to the income aspect of your argument, is it the periodical nature of the payment that is important or the fact that there is no activity associated with the production of the income? That is the key issue.

MR GAGELER: In respect of the deduction.

KIEFEL J: Yes.

MR GAGELER: Yes, your Honour.

KIEFEL J: Is it the latter because it is the lack of activity on the part of the taxpayer to produce the income that limits the connection to the expenditure?

MR GAGELER: Your Honour is correct. Yes. I will put it in slightly different ways but your Honour has gone to the nub of the point.

KIEFEL J: That is why I wondered whether the periodical nature of the payment really takes you very far if it is really the activity basis of it – that is what we are really talking about.

MR GAGELER: Yes, well I am dealing with two issues. At the moment I am just dealing with income, which has been raised as an issue. The circumstance that this is income, only because it is periodical and because it is a living allowance, it is not won or earned in some way on our case, is then relevant – highly relevant – to the non-applicability of section 8-1(1)(a) yes, but in a way to which I will come in a moment. So, your Honours, comfortably the Parsons principle 11 is applicable. But we do make the additional point, to which I have already alluded in answer to a number of questions, and that is to the extent that there is an inherent elasticity in the connotation of income according to ordinary concepts, a denotation that brings youth allowance within it is to be preferred because it is the most coherent with the structure and policy of the 1997 Act and before it of the 1936 Act, as it has existed since 1951.

At the very least the parliamentary understanding from time to time is indicative of ordinary usage or ordinary concepts, but we take it further and we would, if necessary, invoke the principle in the Dunmunkle Corporation Case [1946] HCA 13; 73 CLR 70 and, in particular, at page 86.

GUMMOW J: What will that tell us?

MR GAGELER: Strangely, your Honour, the often quoted or often referred to statement of Sir Owen Dixon at the top of page 86 can be applied almost word for word to the current case. I will just read what he said:

It would be a strange result if we were to interpret the prior legislation as giving a wider exemption than that conferred by the provision so that the express exemption it makes would prove unnecessary and the qualifications it places upon that exemption would be futile.

What he says is that legislative developments may cast light on a generally expressed, but ambiguous legislative provision. He is not alone in saying that. Of course, a number of your Honours have looked at this principle from time to time, but in this Court another expression of essentially the same principle is in Elder’s Trustee [1936] HCA 64; 57 CLR 610 at page 626.

Your Honours, can I turn from income to deductions and to the principal question of whether section 8-1(1)(a) is applicable, that question essentially being whether the expenses incurred by the respondent in undertaking the course of full-time study that qualified her to be granted youth allowance were incurred in gaining or producing youth allowance within the meaning of section 8-(1)(a). In our written submissions we have, to some extent, run together two arguments or two versions of our argument which are perhaps better teased out in our grounds of appeal. One way in which we put the section 8-(1)(a) argument is a continuation of the way in which the case was put and decided against us in the Full Court. It focuses largely on the preposition “in” – “in gaining or producing” – which has been the focus of the Court’s attention in the most recent cases.

FRENCH CJ: Just relevantly to that perhaps, at paragraph 18 of your submissions you say:

the expenditure outlaid by the taxpayer was not incurred “for” the receipt of the Youth Allowance.

What is the “for” there a reference to? You have quotes around it.

MR GAGELER: Yes. It is a reference back to the word “productive” and the - - -

FRENCH CJ: You are not invoking a spirit of the old 23(e) exemption?

MR GAGELER: No. I hope I will make that a bit clearer in a moment.

HEYDON J: It is not really a quotation, though; it is a sort of paraphrase of some idea.

MR GAGELER: Your Honour has put it correctly, yes, it is not a quotation of anything. Your Honours could cross out the quotation marks and perhaps underline it for emphasis. That is really what it is intending to achieve. Your Honours, that is one way that we put the argument and I will develop that, albeit only briefly. The other way that we put the argument has perhaps an element of novelty. It is robust and it is focuses not on the preposition but on the words “gaining or producing” and what we say, in essence, is that although youth allowance is, by virtue of its periodicity and its quantification, income according to ordinary concepts within the meaning of section 6-5(1) and although it is derived within the meaning of section 6-5(2), it is not income within the meaning of section 8-1(1)(a) income that is gained or produced. The language of section 8 in referring to deductibility significantly departs from the language of section 6-5(2) in referring to what is drawn in as income.

KIEFEL J: Well, it might not be produced, but why is it not gained?

MR GAGELER: Because the language of “gaining” or “producing” is the expression of a single concept, your Honours, and those words have been repeatedly drawn together in the cases – the word “gaining” being dropped out, the word “production”, “productive” and derivatives of it being focused upon. But as a textual matter it is significant that the word “derived” which appears in section 6-5(2) is not the word that is used in section 8(1A). It does not say losses or outgoings in or in connection with deriving income. It is losses or outgoings in gaining or producing assessable income. That language of juxtaposing “derive” with the words “gaining” or “producing” goes back a long way. The same difference of language, your Honours will recall in sections 25 and 51 of the 1936 Act. The same use of language appeared in the 1922 Act, section 23 and if you go back to the origins, the 1915 Act – the same use of language was there in section 18.

Your Honours, our point here is that there is a distinction which lies behind those words, and it is a distinction between that which comes in the meaning of “derived” so held in many, many cases, that which comes in and the narrower category of that which comes in as a return or reward for the exploitation or use of some talents or resources. That, in our respectful submission, is the essential distinction between the two concepts and it is section 8(1A’s) focus on that narrower concept – a narrower category of income than all income that may be derived within the meaning of section 6-5(2).

KIEFEL J: Where does income which is merely the product of an investment without activity, talent or exertion fit into that?

MR GAGELER: It is the product of the exploitation of capital and, your Honours, what we have said one does not find expressed in any of the cases but, in our submission, it is implicit in Ronpibon Tin and it is implicit, indeed almost expressed, as we read it, in some of the language explaining the Ronpibon Tin test that one sees in Payne, Day and Spriggs in this Court. Your Honours, can I take your Honours to Day and Spriggs in that regard? In Day [2008] HCA 53; 236 CLR 163 the relevant passage is at page 179 and in paragraph 30 it is said about the middle of the paragraph that:

Payne directs attention to the statement made in Ronpibon Tin, as to the question posed by a provision such as s 8-1(1)(a), as correct and appropriate to be applied. The question, as restated in Payne, is: “is the occasion of the outgoing found in whatever is productive of actual or expected income?”

Then the first sentence of paragraph 31:

Essential to the inquiry is the determination of what it is that is productive of assessable income.

That is really a segue into Spriggs, your Honour.

HEYDON J: To get this assessable income, you have to, in effect, comply satisfactorily with the requirements of the course. If one makes a reasonable judgment that to comply satisfactorily with this course you have to spend some money on transport rather than going to university, on a computer and so forth, why is that not productive of the assessable income? You do not get it unless you are complying. You cannot comply unless you make those payments.

MR GAGELER: That is right. There is no doubt that there is a cause and effect. It may be taken that unless expenditure of this nature were made, then the course components could not be complied with.

HEYDON J: Then it produces the income, does it not? If you do it, you will get the next periodical payment. You will not have it taken away from you.

MR GAGELER: It depends what you mean by “produces”? If production of income, if the notion of production of income is all about the earning of income, that is, seeking a reward, seeking some recompense, seeking some compensation in very broad terms, or consideration in the broadest and most general 18th century concept of consideration, for what is done by way of provision of labour or exploitation of capital, then what is happening here is not the production of income. I am sorry, there is a cause and effect. Income is provided, but the income – and income is derived, income comes in, but the income that comes in is not of the product of the exertion that is involved.

FRENCH CJ: You are not implying by that that there is a necessary causal connection between income and deductible expense, are you?

MR GAGELER: These particular expenses, your Honour?

FRENCH CJ: As a general proposition, for deductibility under 8-1, you do not need to show that the income generated is causally connected to the expenditure? I mean, in this case, of course, there is a causal connection. This expenditure in the particular setting we have here and the particular subset of the requirements under section 540 and so forth, is a necessary condition of the entitlement to the youth allowance.

MR GAGELER: That is right.

FRENCH CJ: Where we have a causal connection between outgoing and incoming, are we not in the core area of deductibility?

MR GAGELER: Well, no, because then we would be in the area, for example, of the transport cases, that is, getting to and from work. No. The mere causal connection, even a close causal connection, is not the test.

FRENCH CJ: You seem to be suggesting a kind of causal test that one - - -

MR GAGELER: No, I am sorry. I mentioned the causal element really in response to Justice Heydon’s question to acknowledge the causal element and say really that is not the point. That was the intent of my answer. If your Honours were to go to Spriggs [2009] HCA 22; 239 CLR 1.

KIEFEL J: Just before you do, earlier you said that gaining or producing had been resolved to a single concept.

MR GAGELER: Yes.

KIEFEL J: Most of the cases are concerned, of course, with activities which are productive of income. I wonder whether it has been lost sight of. Is there any case which actually says that gaining drops off the consideration?

MR GAGELER: No. There are lots of cases that say you adopt the Ronpibon Tin test and the Ronpibon Tin test itself drops out the word “gaining”.

KIEFEL J: But nearly all of those cases are activity-based inquiries, are they not? This is peculiar.

MR GAGELER: Indeed. This is peculiar and this really makes my point. All of those cases in which deductions have been accepted as permissible under section 8-1(1), or its equivalents under the 1936 Act or the 1922 Act, have been cases of earning income in the broader sense in which I have used it of the production of income in the sense of exploiting talents or resources with a view to gaining compensation or reward for the exploitation. Your Honours see in Spriggs [2009] HCA 22; 239 CLR 1 at paragraph 55 the familiar language of Ronpibon Tin which was rephrased in Payne and that language is that:

“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 - - -

GUMMOW J: This word “productive” is the problem.

MR GAGELER: Well, I am trying to unpack the word “productive” –

or, if none be produced, would be expected to produce assessable income.”

There is a passage in a judgment of Justice Lindgren focusing on the expectation of producing assessable income which, in our respectful submission, captures our point pretty well. I will come to that in a moment, but before I do, if your Honours then look down at paragraph 56 within the joint judgment’s expounding of the relevant Ronpibon Tin principle, without reading what is there said, your Honour will see that the word “earn” is used in connection with “income” and as an appropriate version, an appropriate word to use in explaining what is meant by the production of income. It is, in our respectful submission, the earning of income. The word “earn”, I think, is used two or three times there and it is used again in paragraph 57 and in the second sentence of paragraph 57 it is said:

If each of the appellants was engaged in the business of exploiting their sporting prowess . . . it becomes necessary to ask whether the [expenditure was] incurred in the course of gaining or producing their assessable income from that business.

So one has very strongly, in our respectful submission, in the Ronpibon Tin test itself and in the application of the Ronpibon Tin test, we think throughout the cases, but particularly in the recent cases and particularly in Spriggs, this notion of the production of income really involving the earning of income and being limited to the earning of income. Now, the decision of Justice Lindgren to which I wanted to refer is footnoted in our submissions. It is Spassked [2003] FCA 84; 197 ALR 553 at page 593, if your Honours have it.

KIEFEL J: I think this is the second case this morning that has not been on the list.

MR GAGELER: I am so sorry, your Honours. I thought these had been - - -

KIEFEL J: It makes it a bit hard for us to follow.

MR GAGELER: Of course. I sincerely apologise for that. Your Honours, at paragraph [165] where his Honour is unpacking the language of the Ronpibon Tin formulation, he says, about six lines into - - -

GUMMOW J: I am sorry; paragraph [165].

MR GAGELER: Paragraph [165] at page 593. He says about six or seven lines in:

The word “expect” has the primary meaning of “look forward to” . . . This primary meaning does not carry only a positive connotation, such as, “look forward with pleasure to”: one can also “expect” unwelcome things to happen. In this respect, the word is neutral, etymologically speaking. But since expectation is linked in the present context to the occasion of a taxpayer’s incurring of a loss or outgoing, their Honours in Ronpibon can have intended only a positive connotation. In the result, references to expectation in the context of s 51(1), properly signify that the voluntary incurring of a loss or outgoing must be seen to be explicable by the taxpayer’s “favourably looking forward to” the gaining or producing of assessable income as a result, or must be seen to be “for” -

and his Honour puts the word in quotations I think in the same way as we did in our paragraph 18 –

or “for the purpose of”, or “directed to” the gaining or producing of such income. It is erroneous to think that expectation in the mere neutral factual sense is sufficient.

In our submission, that passage in his Honour’s judgment is a correct understanding of the Ronpibon Tin test and is really about the best explanation that we can find in any of the decided cases of the notion of the expenditure needing to be expenditure that is in the course of earning or attempting to win a reward for section 8-1(1)(a) to apply.

KIEFEL J: There must be some examples of – you say there are none – but where a person is qualified to receive income but is not required to exert any capital or activity?

MR GAGELER: Yes.

KIEFEL J: But, nevertheless, their qualification might either cost them some money directly as a result of some condition for the qualification. That is the sort of area we are in, is it not?

MR GAGELER: Yes. It may well be - - -

KIEFEL J: Looking outside social security ideas to perhaps older ideas of how people qualified for income when they did not earn it at all, which is not unknown in our history, I suppose, as heirs or as qualifying in that sort of sense.

MR GAGELER: Yes, in that sort of sense. The mere qualification, in our respectful submission, is not sufficient to fall within the general deductibility provision of section 8-1(1)(a).

KIEFEL J: But what if it was a condition of their benefiting under that qualification that they do things? For instance, upkeep the lawns in the heredity mansion, would not they be tax deductible against the income, or they would be outgoings of a capital nature, I suppose?

MR GAGELER: Yes, and then note that it is probably a trust arrangement which would bring in other considerations, but - - -

KIEFEL J: These are very imperfect analogies.

MR GAGELER: But if the question is, where a string of income is provided to a taxpayer periodically and for the maintenance of the taxpayer upon the taxpayer meeting certain conditions, is expenditure incurred in meeting those conditions necessarily deductible? In our respectful submission, the answer is no. There may be circumstances in which such expenditure is deductible, but that would involve characterising the activities of the taxpayer on which the expenditure is made as the exploitation of resources in some way. Can I give your Honour an example?

One might have a taxpayer who is an academic who applies for and is granted an allowance to undertake some research for a period, the allowance simply being a living amount granted under a Commonwealth scheme. One can see that the expenditure incurred in undertaking that research would be fairly readily deductible under section 8-1(1)(a) in circumstances where the business or profession of the person is to conduct research and to gain income by conducting that research.

That is different from the present case where what is happening is not somebody engaging in the profession of a student for the purpose of gaining youth allowance, a person who is attending university with a view to getting the qualifications and going on to other things, but the attendance at the university for that purpose is why the expenditure is incurred and the youth allowance is simply a benefit provided to the person in that situation.

KIEFEL J: I just want to test the notion that, as your written submissions assert, in this context there can never be the production of income to which expenditure can attach. If there was a social security payment for which a doctor could qualify, some form of social security payment for which you had to be a doctor, that was one of the conditions of qualification and a doctor has to pay registration to maintain the status as a doctor, you would have a deduction then, would you not?

MR GAGELER: Well, there again one can characterise – using the broad test that has been said to be applicable in Stone and Spriggs and cases of that nature - - -

KIEFEL J: I did not say the doctor was doing anything.

MR GAGELER: - - - one has to stand back from the totality of what is occurring and say this is part of the way in which this taxpayer, the doctor, earns an income, and that is the difference, your Honour. It is not an incidental living allowance.

GUMMOW J: Section 17 of the 1936 Act, before it was submerged by all this plain English, levied income tax by reference to the notion of derivation, but the notion of derivation, when it comes to section 51, is transmuted into gaining or producing.

MR GAGELER: That is what I am arguing against, your Honour. I am saying that there is a difference in language followed through, as I said, from the original 1915 Act through the 1922 Act where the same words appeared in the same section in each of those Acts, “derived”, “income derived” in the first line, and further down when it came to deductions, “deductions in gaining or producing income”. The burden of this argument is that when it comes to income that is gained or produced, the income is a narrower category than the income which is derived.

GUMMOW J: What would be the rationale for that?

MR GAGELER: The rationale would be to - if I can use Professor Parsons’ language to make sure that working expenses are deductible from income, from growth income, that is to focus upon that which is truly productive. I am afraid that I tend to be using the same language over and over to answer your Honour’s question.

Your Honours, the other way, that is the more orthodox way in which the case was put at first instance and which we do rely upon here is to focus on the word “in” and the collocation “in gaining or producing”, the necessity being to look for what is in the course of gaining or producing income, what is the occasion for the expenditure and what is productive of actual or expected income.

GUMMOW J: The cases seem to, I do not know whether they do it overtly, but the cases seem to treat the word “in” as more intensive than a phrase like “in relation to”.

MR GAGELER: It is more intensive. It requires much more than a causal connection, as is illustrated by Payne and the transportation cases, and it requires more than mere contemporaneity, if I can put it that way, which is illustrated by the case of Cooper. That, your Honours will recall, was the footballer who was told that he had to eat in order to play football and, no doubt, he was eating while he was - - -

GUMMOW J: He had to bulk up.

MR GAGELER: He was bulked up. So it is a little hard - - -

GUMMOW J: What is the citation of Cooper actually?

MR GAGELER: Cooper is [1991] FCA 190; 29 FCR 177. In particular, your Honours might usefully look at the judgment of Justice Lockhart at page 184. His Honour says in the first full paragraph on page 184:

The question whether the additional expenditure of the taxpayer is deductible under s 51(1) cannot be answered simply by a process of reasoning that, because expenditure of this kind is a prerequisite to the earning of the taxpayer’s assessable income (in the sense that it is necessary if assessable income is to be derived), it must be incidental and relevant to the derivation of income.

GUMMOW J: Yes, the notion then is essential, you see. So there is some notion of essence that is being used. I am not criticising it but - - -

MR GAGELER: Yes, and that has been criticised in other cases that the essential character – that point can only be taken so far. Justice Hill attempted to put it in slightly other words at page 198 and again there is no precisely – there is no crisp passage to refer to, but his Honour does gain something at the top of page 198 from the quotation from Charles Moore. Your Honours see:

“What matters is their (ie the loss or outgoing) connection with the operations which more directly gain or produce the assessable income.”

Either way, that is whether one focuses on gaining or producing and says these payments of youth allowance were not gained or produced or whether one focuses on the word “in” and says the necessary connection does not exist. The error that we point to in the reasoning of the Full Court of the Federal Court is at page 107 of the appeal book where, in the second sentence of paragraph 40, it is said that the respondent in this case “was paid to undertake the course in which she was enrolled”. We would say this, that she was not paid to undertake the course, she was paid because she undertook the course and because she applied for and, by undertaking the course, met the qualifications for youth allowance.

GUMMOW J: But to retain the benefit, to retain the periodical payments, the student had to keep engaging in various activities.

MR GAGELER: Yes. Our point is that the payment was not a reward for the effort of undertaking the course.

FRENCH CJ: There is a policy behind the payment reflected, surely, in the criterion of enrolment in the full-time course and that is to either encourage or support people who undertake such courses and otherwise qualify.

MR GAGELER: It is to provide them with a living allowance - - -

FRENCH CJ: Well, for a reason.

MR GAGELER: - - - and thereby to encourage them to remain in the course, yes.

FRENCH CJ: Yes.

GUMMOW J: Does the Commissioner see any circumstances in which there could be a deduction of a taxpayer in the situation of this taxpayer’s?

MR GAGELER: No.

FRENCH CJ: Bank fees, I think were mentioned somewhere in the reasons.

MR GAGELER: There may be some specific provisions, but as a general principle, no.

GUMMOW J: No. I mean in terms of section 51.

MR GAGELER: No. Or section 8-1(1)(a) the answer is no. We put it in two ways. One is the payment is not a reward for the effort of undertaking the course. The other way we put it is that undertaking the course is no more than the fulfilment of a condition precedent for the payment.

KIEFEL J: Because the payments under the course start on the day of approval, it is not a situation where the payments are being made consequent upon someone achieving a particular – having already got to a particular position, say, two weeks or four weeks into a course. They are paid regardless, from the time of approval for qualification.

MR GAGELER: Yes.

KIEFEL J: The rest of the time the maintenance of the payments depend upon the student maintaining their entitlement to the allowance?

MR GAGELER: Yes.

KIEFEL J: So a question might be whether there can be any expenses associated with the maintenance of the entitlement to the allowance?

MR GAGELER: Well, in our submission, no and if these deductions are allowable then it would seem that other expenses that are involved in any student undertaking a course of study by which the student qualifies for any amount of the means-tested youth allowance would also be deductible. In our submission, if one is looking broadly at what is occurring here, as the cases say must occur, looking at the position of the taxpayer what is clearly enough occurring is the taxpayer – the student – is undertaking the course of study not for the purpose of obtaining youth allowance, but as an end in itself as an investment in the taxpayer’s future and - - -

KIEFEL J: But purpose is really by the way in this consideration, is it not? There is no purpose test involved.

MR GAGELER: Not entirely, but it is a question of the characterisation of the expenditure and whether it is appropriate to describe it as being incurred with a view to the production of income within the expectation of income, to use the Ronpibon Tin test and our submission is no.

KIEFEL J: Well it is being paid in order that the gaining of income may continue if one gives any meaning to the word “gain”.

MR GAGELER: The expenditure is being incurred to allow the student, or in the course of the student undertaking study. In no meaningful sense can it be said that a student in receipt of youth allowance is in the business of studying for the receipt of youth allowance. That is really just - - -

KIEFEL J: Well, that might be so, but they have to continue their studies to qualify for the allowance on the periodical notion that you put forward.

MR GAGELER: Yes, your Honour, yes.

KIEFEL J: We are going over the same ground.

MR GAGELER: We are going over the same ground. Your Honours, the alternative argument that we put is one that is based on section 8-1(2)(b) and the relationship between 8-1(2)(b) and 8-1(1)(a) and the argument we put there, an argument not put in the Full Court, is that even if the outgoings were relevantly productive of youth allowance so as prima facie to fall within section 8-1(1)(a) no deduction is available because they were nevertheless outgoings of a private nature within section 8-1(2)(b).

KIEFEL J: This was not a point taken below?

MR GAGELER: No. That, of course, was the subject of some discussion at the special leave application, your Honours. Our notice of appeal captures the point. The nature of an outgoing, which is what section 8-1(2)(b) requires one to look at, requires a focus on the essential character of the outgoing.

Focusing on the essential character of the outgoing, for the purposes of section 8-1(2)(b) really, in our submission, flows from the language of the section, but it is also the way in which the equivalent language has been approached by the Court in Forsyth and in Handley. We have referred to those - - -

GUMMOW J: Who is this “living”, as distinct from dead, “human being” at paragraph 25 of your submissions, Mr Solicitor?

MR GAGELER: Well, the word “living” is redundant, your Honour.

GUMMOW J: Yes.

MR GAGELER: Your Honour can cross that out.

GUMMOW J: It is not a quotation either, is it?

MR GAGELER: No. I can put it in my own words, your Honour, as well, if one is asking what is an outgoing of a private nature?

FRENCH CJ: A lot vagrant quotation marks around.

MR GAGELER: An outgoing of a private nature, or if I put it this way, an outgoing is of a private nature where the explanation for the outgoing lies in the enhancement or improvement of the capacities of an individual as distinct from an enhancement or improvement of the current income earning activities of the individual.

GUMMOW J: In Finn’s Case 106 CLR 60 at 70 Sir Victor Windeyer concluded by saying that:

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.

MR GAGELER: Yes, that is right.

GUMMOW J: Well, why is this any different?

MR GAGELER: This is because we are not talking about satisfaction or pleasure. We are talking about the objective purpose for which the taxpayer is undertaking the course of education to gain qualifications as a teacher and it is to go on and become a teacher in the future. The case is closer, in our submission, Hatchett [1971] HCA 47; 125 CLR 494, which followed after Finn, and there are a number of categories of expenditure in Hatchett, but there was one category of expenditure which was of university fees.

If your Honours look at the head note, it is the $71 which is referred to towards the bottom of the page, page 494, and it was held that those university fees did not give rise to an allowable deduction because there was not a sufficient connection between the making of the payment and the gaining of the assessable income, but in addition, his Honour Justice Menzies at page 501, in the full paragraph on that page, in the last line also, in our submission, correctly said:

The payment of university fees was, I think, expenditure of a private nature - - -

GUMMOW J: Why?

MR GAGELER: He does not say but, in our submission, it was expenditure of a private nature because it was explained as an attempt by the taxpayer to better the taxpayer as an individual, not as an attempt by the taxpayer to enhance the taxpayer’s current income earning activities.

GUMMOW J: What does this phrase “as an individual” mean apart from some feel-good notion.

MR GAGELER: I can only put it in terms of an investment in human capital, your Honours, and an investment in human capital is essentially of a private nature, just as an investment in real capital is an investment of a capital nature and taken out by section 8-1(2)(a). Your Honours, as to the relationship between section 8-1(2)(b) and section 8-1(1), may we point to what is said in John’s Case [1989] HCA 5; 166 CLR 417. It is said only in dicta, in our submission, correctly, or it is pointed out at page 427, about the middle of the page in the sentence beginning “Certainly”:

a loss or outgoing may be incurred in gaining or producing assessable income and yet be non-deductible by reason that it is a loss or outgoing of capital or of a capital or domestic nature -

That is in section 8-1(2)(a) or the other bit of paragraph (b). At page 431 it is said in the last full paragraph on the page:

We do not see any necessary antipathy between a loss or outgoing incurred in gaining or producing assessable income and a loss or outgoing of a private nature.

That is to say, it is quite possible to have an outgoing that falls within section 8-1(1)(a) but does not give rise to a deduction because it is taken out by section 8-1(2)(b). If your Honours please, those are our submissions.

FRENCH CJ: Thank you, Mr Solicitor. Yes, Mr Anstis.

MR ANSTIS: Thank you, your Honours. There are two separate grounds of appeal. One concerns the claim that youth allowance was not gained or produced by study and the other is that the education expenses were private in nature. I will first address the issue of whether or not the education expenses were private in nature. As stated, this was not heard in the courts below; it was only raised now. The relevant section is section 8-1(2)(b) and it is simply this. You can deduct from your assessable income any loss or outgoing to the extent that is incurred in gaining or producing your assessable income, however, you cannot deduct a loss or outgoing under this section to the extent that it is a loss of outgoing of a private or domestic nature.

Your Honour, my argument is simply that the expenses were not of a private nature, they were of a public nature. Your Honour, the appellants are not arguing that the expenses were domestic. They are simply arguing that they were private. The word “private” is defined in the Concise Oxford Dictionary and it may be helpful because I handed up a thing called “Respondent’s documents” and I have got, for example, dictionary definitions and these sort of things in there. At page 3 the Concise Oxford Dictionary defines “private” to be:

Kept, removed, from public knowledge . . . Not open to the public . . . not affecting the community . . . Confidential –

et cetera. Your Honour, the respondent’s education expenses were not of a private nature since the course which required the expenditure was open to numerous people and was undertaken by a number of students. Furthermore, the expenses were of a kind dictated by the course, for example, prescribed textbooks, and these expenses concerned the public in that they were incurred in the carrying on of a course at an institution that received government and church funding and whose methods are subject to public scrutiny and comment and whose results are used by employers and others to assess if a person is suitably qualified to undertake particular occupations such as teaching.

As far as a general interest goes in courses, we could see, for example, currently there is a system called MySchool website so people think that what goes on at a school is of general interest to the community in general; it is not a private matter. To give an example of how the expenses could not be private, one of the expenses undertaken by the respondent was supplies during teacher rounds, and if we imagine that one of the supplies she provided was, say, a times table for the children which was handed out, and it could say, for example, something like four times seven is 30, if this was taken home to one of the parents of the children and the parent complained to the principal and said “Look what this student teacher has handed out – four times seven is 30”, the principal is not going to say, “Well, I am sorry, this is a private matter”. If he did it would be perhaps shocking to the community who thought that Parliament would not intend such use of the word “private”. I think this demonstrates that the expenses were not of a private nature, they were of interest to numerous people.

Furthermore, it is not understood how some students whose source of income is, say, from an employer, would not have their expenses classified as being private when a person doing an identical course would have their expenses classified as private because their source of income is youth allowance.

In this case the respondent was doing a teaching course at Australian Catholic University and it can be surmised, and I think in fact is the case, that other people doing the course are already teachers but they wish to upgrade their qualification. Now, these kinds of cases deductions have been allowed in the past because the person is increasing their future income and there has never been an argument to say that while they were private natured it is linked to their income. But it is not seen how a person doing an identical course incurring identical expenses that one could be private and one could be not private. It just seems to be an improbable conclusion to reach.

It is acknowledged that an outgoing that is incurred in gaining assessable income could nonetheless be not deductible because it was of a domestic or private nature. However, the respondent is not aware of a single case, nor have any been cited, where education expenses have been considered to be deductible under the positive limb of subsection 8-1(1) but have then been disallowed under the negative limb of subsection 8-1(2)(b) because they were considered to have a private nature.

The closest I can come to a case where the expenses were considered to be gained in earning the income of – that is not the exact words, but nevertheless, and then considered to be private, was a South Australian case called Milne v Deputy Commissioner of Taxation which is found at page 4 of the documents handed up to you.

FRENCH CJ: The reference?

MR ANSTIS: The reference, sorry, your Honour, is (1931) SASR. I am sorry, that is probably not the exact reference. I am sorry for that.

FRENCH CJ: SASR 234.

MR ANSTIS: I am sorry, your Honour. Your Honour, in this case it was an unusual case in that a company paid the wife of one of its employees who was looking after the children and living separately from the husband an amount to look after the children and the judge, Chief Justice Murray, thought that the amount paid to the wife would be income but he commented that the expense of looking after children would not be deductible because they were of a private or domestic nature.

This is also slightly different legislation to what we are dealing with now. I just use it for illustration. It is also slightly relevant to social security payments in that social security recipients are sometimes paid to look after their children or family members, for example, carer’s allowance, so it could well be in cases such as this that the amount paid to the social security recipient would be income but they would be unable to claim deductions because they were private or domestic. However, this is by way of illustration only.

I also refer your Honours to what the appellants have said at page 9 of their written submissions which is on page 7 of the documents – my respondent’s documents – where they refer to:

The essential character of the outgoings was private in nature because the outgoings she incurred were related to her state as a “living human being”.

Your Honours, this reference comes from a case called Norman v Golder which is an English case which has got slightly different legislation and I have attached at least part of the case which is at page 8 and page 9.

GUMMOW J: What is the citation, Mr Anstis?

MR ANSTIS: Yes. I am sorry, your Honour, I have not got the citation in front of me. It is - - -

GUMMOW J: You have to be prepared for these things.

HEYDON J: [1945] 1 All ER 352 at 354.

MR ANSTIS: Thank you, your Honour. This was a case before Lord Greene and it concerned a taxpayer who claimed the cost of going to the doctor against their assessable income. What Lord Greene said - which is at page 9 of the documents I have handed up – he said:

It is quite impossible to argue that a doctor’s bills represent money wholly and exclusively laid out for the purposes of the trade, profession, employment or vocation of the patient. True it is that if you do not get yourself well and so incur expenses to doctors you cannot carry on your trade or profession, and if you do not carry on your trade or profession you will not earn an income, and if you do not earn an income the Revenue will not get any tax. The same thing applies to the food you eat and the clothes you wear.

GUMMOW J: What is the provision that the English Court of Appeal was construing?

MR ANSTIS: I am sorry, your Honour, I have not got the - - -

GUMMOW J: It is no good just reading us out what is said at page 354. We have to know what the statute was and what it said.

MR ANSTIS: I am sorry, your Honours.

HEYDON J: It is letter D on that page, just above what you were reading.

MR ANSTIS: I am sorry, it is:

Sched. D, cases I, II, in which deduction is prohibited in respect of:

. . . any disbursements or expenses, not being money wholly and exclusively laid out or expended for the purposes of the trade, profession, employment or vocation.

GUMMOW J: Well, they are famously different, are they not, to the words in the Australian legislation?

MR ANSTIS: Yes, they are, your Honour. The only reason that I am referring to it is it was referred to in the appellant’s submission where the quote came from.

GUMMOW J: Yes, I understand that.

MR ANSTIS: I wanted to show that it does not actually refer to - - -

GUMMOW J: It does not have a happy provenance.

MR ANSTIS: Sorry, yes. Yes, I am very sorry, your Honour. All I wish to say is that it does not refer to private or domestic, which is how it has been used by the appellant. It actually says that expenses of that kind are not:

wholly and exclusively laid out for the purposes of the trade, profession or vocation.

The same thing applies to the food you eat and the clothes you wear:

They are laid out in part for the advantage and benefit of the taxpayer as a living human being.

So, your Honour, what I wished to say was that the reference to “a living human being” is not actually referring to private expenses.

FRENCH CJ: Paragraph (b) of the rule referred to in that case is mentioned at the end of the paragraph you are reading from and is directed to:

a sum expended for a domestic or private purpose - - -

MR ANSTIS: Yes, that is right, by inference it can apply to the private and domestic exception. However, your Honour, the principle would not apply to study because study is not like food, clothing or medicine. It does not sustain you as a living human being. Your Honour, essentially these are my arguments to say that the expenses were not of a private nature, they were of a public nature. Your Honour, I will now turn to the major argument, which was to do with the deductibility under the first limb.

FRENCH CJ: Now, Mr Anstis, without wanting to bind you in any way, can I get a rough estimate of how long you would expect to be?

MR ANSTIS: Well, if there was no questions, as I am sure there can easily be, it takes about 50 minutes.

FRENCH CJ: Yes. Sorry, I was looking at the wrong hour. Go ahead.

MR ANSTIS: Thank you, your Honour. So section 8-1(1) says:

You can deduct from your assessable income any loss or outgoing to the extent that:

(a) it is incurred in gaining or producing your assessable income –

As stated, the Federal Court has considered this argument in a lot of detail and articulated why the education expenses are deductible under this limb. Your Honour, I do not think I can improve on it, but at the most general level youth allowance is paid to people in particular circumstances to study. Youth allowance is classified as income because it is derived through personal exertion. The personal exertion is a gaining or producing activity. The cost of such an activity is therefore a deductible amount.

On a more specific level the respondent gained her allowance by qualifying for youth allowance. To qualify she needed to satisfy the Secretary of the Department of Human Services that she was making satisfactory progress in an approved course of education and from that it would follow that the cost of the study would be deductible. Your Honour, my argument is essentially that the respondent gained her income by study, as it was necessary for her to study to obtain the income, and what is more, the act of studying - - -

GUMMOW J: Sorry, necessary for her to study to what?

MR ANSTIS: To obtain the income – obtain. Sorry.

GUMMOW J: Or to retain her entitlement, is it not?

MR ANSTIS: Yes, your Honour.

GUMMOW J: Is that a more accurate way of putting it?

MR ANSTIS: That is a better way of putting it, your Honour. Thank you. What is more the act of studying rendered a service to the government which it paid for. Your Honour, the argument of the appellant is essentially that youth allowance is a form of income that is not gained or produced by any acts and . . . no outgoings can be incurred in gaining or producing the income.

Thus, your Honour, the appellant in their written submission, which is at page 11 of the documents I have handed up, quotes Professor Parsons – and I will not read the whole thing – but essentially it says:

A gain which is one of a number derived periodically has the character of income when there is no other element of form that points to a different conclusion: this is Professor Parsons’ eleventh proposition concerning income in ordinary concepts.

He then goes on to say that it does not arise from the product of employment or of services. Then in paragraph 17, which is on page 12 of the documents handed up, it says:

Where a taxpayer derives income which is assessable by reason only of the periodicity principle (as earlier discussed at par 7), no items of expenditure associated with the receipt of that income can satisfy the positive limbs of s 8-1.

The response to that essentially is that for a payment to be assessed as income the recipient must have undertaken some act of personal exertion to obtain it and that exertion is a gaining activity, but even if I am wrong about the nature of income in general with respect to this particular type of income being youth allowance, the payments were gained by the act of study, so the cost of study will be deductible.

GUMMOW J: Have you looked at section 262 of the Act?

MR ANSTIS: Which Act, sorry?

GUMMOW J: Of the Income Tax Act?

MR ANSTIS: Sorry, your Honour?

GUMMOW J: Periodical payments in the nature of income. Does that shed any light on this periodicity principle?

MR ANSTIS: Your Honour, it is not doubted that periodical payments can be income, but the nature of the periodical payments there is for a contract agreement or arrangement in writing where the person assigns – is property transfers and the like.

GUMMOW J: In exchange for periodical payments?

MR ANSTIS: Yes, your Honour. There is no doubt that being a periodical payment can – what can I say – put weight to somebody’s income, but it is not, I would submit, a condition by itself.

GUMMOW J: That section is conditioned upon an opinion of the Commissioner, is it not, either wholly or in part really in the nature of income?

MR ANSTIS: Yes, your Honour, that would seem to suggest that some periodical payments would not be income, but unfortunately I cannot shed much light on that, I am sorry. Your Honour, Professor Parsons, in his proposition, refers to - - -

GUMMOW J: Does Professor Parsons deal with section 262 at all?

MR ANSTIS: Not to my knowledge, your Honour.

GUMMOW J: Yes, go on.

MR ANSTIS: Professor Parsons refers to gains by the taxpayer, but by the very use of the word “gain” it would suggest that this income must be gained, because it is a very strange choice of words to use the word a series of “gains” if you did not think that the amounts were gained. An example that I was thinking of just before when it was mentioned about whether something could be gained just by qualification, I was thinking that perhaps someone might win something like the Miss World competition and a condition of payment is that they must maintain their appearance, be like well dressed, et cetera, and it seemed to me that that does not really require any particular act. It is really a qualification which you maintain and it could well be in a case like that that a person could claim various expenses. I am not sure how relevant it is, but it is very difficult to come up with close analogies.

Your Honour, the appellants argued at paragraph 20 of their submissions which is on page 15 of the documents I have handed up - it said:

With respect, the taxpayer was not “paid” to undertake her studies. She undertook her studies to qualify as a teacher. The Youth Allowance was paid to her as a means of support whilst she was enrolled as a student. It was not paid by the Commonwealth to her as consideration or as a reward for undertaking her study.

Your Honour, I would argue that if youth allowance was just a series of payments and it was not paid as a reward for service or because of any exertion undertaken by the taxpayer, it would not be assessable income within the meaning of the Income Tax Acts, and your Honour, the reason I say this is that section 6 of the Income Tax Act 1936 defines two terms which I think are relevant, the first being income from property and the other being income from personal exertion.

Your Honour, it seems clear to me that youth allowance could not be income from property simply because it is very hard to see how property has anything to do with youth allowance. So the issue would be whether it is income from personal exertion. Income from personal exertion is defined as being – means income consisting of allowances, pensions, et cetera, received “in relation to any service rendered”, your Honour, while “income from property”:

means all income not being income from personal exertion.

Your Honour, if youth allowance is not income from personal exertion, the fact is, clearly not income from property means it would not be income at all. Your Honours, income is referred to in several places in the Acts so I will try to explain how I see it all connecting. Your Honour, assessable income consists of ordinary income which is defined in section 6-5 and also statutory income which is defined in 6-10. Section 6-5 says:

Your assessable income includes income according to ordinary concepts, which is called ordinary income.

Section 6-10 says:

Your assessable income also includes some amounts that are not ordinary income.

Amounts that are not ordinary income, but are included in your assessable income by provisions about the assessable income, are called statutory income.

These terms received further clarification in other parts of the Act including Division 15. However, I would submit, your Honour, that the meaning of “assessable income” is modified by the definitions contained in section 6 of the 1936 Act. Thus it could be that some payments received would, in the absence of section 6, be ordinary income, but the application of section 6 would exclude it.

Your Honour, section 6 is not a definition of “income” per se. It cannot turn something which is not income into income, but it can modify the meaning of “income” so that something which might otherwise be considered income is not, in fact, income. Your Honours, I would submit that for an amount to be assessed as income the taxpayer must provide a service or at least undertake some activity. The cost of that service or activity is then, other things being equal, deductible.

Such a relationship between income and deductions reflects simplicity and harmony and this may be an indication of its truth. It is also the case that Parliament intended that certain incomes could not attract deductions for activities. It should have spelt it out clearly. Your Honours, as I have stated, a system where to do something to get a payment for it to be assessed as income and then the cost of doing that thing as deductible, other things being equal, is a very harmonious and simple system that accords with a natural reading of the statute.

For youth allowance to be assessable income, the respondent needed to do something and that thing was study and study expenses would therefore be deductible. Also there are other things being equal, your Honour, not private, not capital, etcetera. Your Honours, I would submit that it was the case the respondent did not do anything to get the youth allowance, then it would not be assessable income. I would also submit that if Parliament wished to have a certain kind of payment assessed as income but then to deny the taxpayer the possibility of claiming any deductions at all, they should have said so in the clearest terms. Their silence in the matter suggests that it was not their intention.

BELL J: You took us a few moments ago to the definition in the 1936 Act.

MR ANSTIS: Yes, your Honours. Sorry, your Honour.

BELL J: Does anything turn, in your submission, on the definitions of “income from personal exertion” contained in that Act? Was that your purpose of - - -

MR ANSTIS: Yes, your Honour, I say that youth allowance is income from personal exertion, but I am saying that the argument given by the appellants was that, well, it is not for anything, this is just a series of payments, and I was - - -

BELL J: I think I understand that, but I was just wanting to check why you were taking us to the definitions in the 1936 Act?

MR ANSTIS: Because the 1936 Act and the 1997 Act, these are current legislation.

BELL J: Yes.

MR ANSTIS: So the 1997 section – I am sorry.

BELL J: No, I am sorry, Mr Anstis. I am just trying to understand. Was it the definitions in the 1936 Act of “income from personal exertion” that you were taking us to? I just want to understand the argument.

MR ANSTIS: Yes I was, your Honour.

BELL J: Yes, all right.

MR ANSTIS: I am very sorry if I was not clear about that.

BELL J: No.

MR ANSTIS: Your Honours, I am sorry for that delay. Notwithstanding my analysis, it is acknowledged that Justice Webb in the Squatting Investment Co Ltd v Federal Commissioner of Taxation, which is also in the documents called “Respondent’s Notes”, the bit that I am quoting, but the citation is [1953] HCA 13; (1952-1953) 86 CLR 570, at page 613. In this case Justice Webb stated that – this is on page 23 of the documents handed up, if you wish to read the quote. I will not read the quote in full detail:

In the Commissioner of Taxation v Dixon this Court held that gifts that were not derived from such sources were nevertheless income under s 25. That was because they were periodical and were for the maintenance of the donee and his dependants. That case indicates that even such undoubted personal gifts as charitable payments made e.g. to a pauper in a hospital or other institution for his maintenance therein are income within s 25. They are not income from personal exertion or from property, apart from the statutory definitions, but they are still to be regarded as income within the ordinary meaning of the term.

Your Honour, with the greatest of respect, I think that Justice Webb’s analysis of Commissioner of Taxation v Dixon is not correct. The case of Commissioner of Taxation v Dixon concerned the issue of whether a payment made by a company to a former employee who was an enlisted soldier during World War II was assessable income. Although it was the case that the majority Judges, being Chief Justice Dixon, Justice Williams and Justice Fullagar, ruled that the payments were assessable income, it was not the case that the majority of Judges ruled that the payments were assessable income even though they were not from personal exertion.

The minority Judges, Justice McTiernan and Justice Webb, both said that the payments were not assessable income as they were not paid in respect of any employment or services rendered, whilst the majority Judges, or two of them, Chief Justice Dixon and Justice Williams, said there was a relevant service, which was the war service. If I can read through some quotes from these cases just to illustrate what I have said is true. They will be found on page 24 of the documents I handed up. Justice Webb said:

In my opinion the reward was not given or received “in respect of, or for or in relation directly or indirectly to, any employment of or services rendered by” the taxpayer, and so does not come within s 26(e) of the Income Tax Assessment Act 1936-1943.

Similarly, Justice McTiernan said:

All the facts clearly point to this not being a payment in respect of the respondent’s employment or in respect of services rendered by him or a payment to the respondent in his capacity as an employee.

The main quote that I wish to refer to is from Chief Justice Dixon and Justice Williams where it is said:

Because the ₤104 was an expected periodical payment arising out of circumstances which attended the war service undertaken by the taxpayer -

That it goes on income. So it is noted that Chief Justice Dixon and Justice Williams refer to a service, which is the war service. So at least four of the Judges have specifically referred to there being a service for there to be income. Even the fifth Judge, Justice Fullagar, who – and I quote from page 27 of the document which was handed up – said:

I understood Mr Wallace to contend that the conclusion expressed above must be the end of the matter, and that, if the receipts in question could not be brought within the definition of “income from personal exertion” in s 6 or within s 26(e), they could not be treated as assessable income under the Act. This argument is not without an appearance of logic, but, in my opinion, it cannot be accepted.

Then on page 28 Justice Fullagar goes on to say:

For the reasons given, the receipts in question may be assessable income from personal exertion although not comprehended within the terms of the definition in s 6 -

Why he says this is that section 6, he says, is not a closed definition, it is not an exhaustive definition, so it really has to fit in generally with the category rather than the specific terms of section 6. Your Honours, I also note that in the case of Keily v Commissioner of Taxation 32 SASR 494, which the appellants referred to, and which is at page 29 of the documents handed up, the issue of whether an aged pension was income was discussed. On page 31 of the documents handed up his Honour stated:

In relation to a pension being income, I am not assisted by the definition of “income from personal exertion”. It seems strange to me that no pensioner has previously challenged the assessment of tax on his or her aged person’s pension . . .

In my opinion, an age pension is clearly “income” within the meaning of s 25 of the Act.

With respect to his Honour’s position, the respondent submits that such reasoning is not consistent with the clear words of Parliament and is not based on authority.

To conclude my arguments simply about this income part, I would state that if, in fact, a payment which is clearly not from property it will not be assessable income unless it is from personal exertion. It will not be income from personal exertion if it is not paid with respect to any service, any exertion not, of course, the payment.

Your Honour, in fact, I was saying youth allowance is actually paid for exertion. So in a way this is like a roundabout argument. I am just simply saying that if it was, in fact, true, that youth allowance is simply paid for nothing to do with what the taxpayer did, then it is not sufficient to say the person gets the payment. That will be income within the meaning of the Act. It has to come from either property or from exertion. That is my submission. But even if I am wrong about this, in this particular case, youth allowance did come from exertion so the argument was slightly redundant. I am not so sure if I should have put that at the beginning of my argument.

FRENCH CJ: Anyway, you are proceeding now on the assumption that the youth allowance is income and we go to the question of deductibility.

MR ANSTIS: Yes. That was perhaps an unwelcome side journey.

FRENCH CJ: That is all right.

MR ANSTIS: Your Honour, even if I am wrong on the necessity for income to come from personal exertion, it will still be the case that youth allowance is, in fact, the type of income that is going to produce because either there is a requirement for some activity to be undertaken to get paid, or an activity is a service rendered.

Your Honour, I will first address the issue of whether youth allowance must be paid as a reward for the expenses to be deductible. At paragraph 20 of the appellant’s written submissions, which can be found at page 15 of the documents I handed up, it says:

With respect, the taxpayer was not “paid” to undertake her studies. She undertook her studies to qualify as a teacher. The Youth Allowance was paid to her as a means of support whilst she was enrolled as a student. It was not paid by the Commonwealth to her as consideration or as a reward for undertaking her study.

Your Honour, section 8-1(1) refers to four relevant terms. They are “losses”, “outgoings”, “gaining” and “producing”. I would submit, your Honour, that these really are the opposite sides of the ledger. Once you have determined that payments received are income it will follow that what goes out is an outgoing or a loss and what comes in is gained or produced. The concept of reward or punishment does not enter the equation. It is sufficient to show that the taxpayer was paid as a result of her studying, to show that she gained the youth allowance by studying, and it will then follow that education expenses are deductible.

Your Honours, the appellant contends that youth allowance payments were not gained by studying, even though it is essential to study to obtain the payments, because they are not paid as a reward for studying. However, the respondent contends that youth allowance payments were clearly gained by her and they were attained for the act of study since that activity was an essential requirement for payment. The meaning of “gaining” as obtaining through an act is not inconsistent with dictionary definitions. The Australian Modern Oxford Dictionary relevantly defines “gain” as obtain, especially something desirable. The dictionary definition is copied at page 35 of the documents that I have handed up.

Your Honours, it is submitted that “gaining” as it is used in section 8-1(1) means nothing more than the opposite of “losing”, the verbal form of “loss” which is also used in subsection 8-1(1). The fact that losing money does not entail punishment or penalty, just as the act of gaining does not entitle reward. As I said, your Honours, an outgoing has no concept of punishment or penalty in it. It is simply what leaves – and it would be a very harmonious system that what comes in is gained or produced. As to the fact that losses or outgoings – that there is no concept of penalty involved I would refer your Honours to the cases of Charles Moore & Co (WA) Pty Ltd v Federal Commissioner of Taxation. The relevant quote is from page 37 of the documents that I have handed up. If you are reading directly from the reports it is at page 350.

FRENCH CJ: This is (1956) 95 CLR.

MR ANSTIS: Thank you, your Honour, yes. This is before Chief Justice Dixon, Justice Williams, Justice Webb, Justice Fullagar and Justice Kitto. What they say is that – at the top of page 350:

“A very wide application should be given to the expression ‘incurred in gaining or producing the assessable income’. But the words refer to the assessable income from which the deduction is to be made . . . It is the total of one side of the account.

Then at the bottom it goes on to say:

“There is no difficult in understanding the view that involuntary outgoings and unforeseen or unavoidable losses should be allowed as deductions when they represent that kind of casualty, mischance or misfortune which is a natural or recognized incident of a particular trade or business the profits of which are in question . . . What matters is their connection with the operations which more directly gain or produce the assessable income.

So, again, the gaining and producing is linked with the losses and the outgoing. Another case which is relevant to this proposition that gaining just means obtaining through an activity is the case of Commissioner of Taxation v La Rosa [2003] FCAFC 125; 129 FCR 494 but I have attached the relevant quotes from – at page 39 of the documents handed up. In that case the Commissioner of Taxation argued that moneys obtained through the manufacture and sale of illegal drugs such as heroin, although income, were not gained or produced by the taxpayer because the activity was an illegal means of obtaining income.

The argument was rejected by the Full Court. In that case Justice Hely’s view seems to be that it is sufficient to demonstrate the taxpayer was carrying on a business and when I say carrying on a business, carrying on a business of gaining or producing income. The relevant quote was:

The Commissioner submits that the theft of money did not occur in the gaining or producing of assessable income. The theft occurred in an illegal attempt by the taxpayer to effect an illegal transaction. The submission should be rejected, as it is inconsistent with the AAT’s factual finding that the taxpayer was carrying on a business of dealing in drugs.

In the same case Justice Carr at page 497 of the judgment which is at page 40 of the documents handed up stated:

If “income” has to be so interpreted, as I think it must for the reasons just given, I think that s 51(1) must also be interpreted literally and that the usual principles should be applied to allow the loss of cash in the present matter as a deduction. In my opinion, it would be an extraordinary public policy which permitted the Commissioner to bring the retail proceeds of heroin and amphetamine sales into the calculation of assessable income, but to deny the loss here claimed as an allowable deduction.

FRENCH CJ: How does this help your argument?

MR ANSTIS: Because, your Honours, I am saying that the losses or outgoings – with that particular quote it is an extraordinary policy to assess something as income but then not to allow losses or deductions.

FRENCH CJ: The critical question is whether this is an outgoing incurred in gaining or producing.

MR ANSTIS: Yes, your Honour, that is right. But once you assess something as income - - -

FRENCH CJ: Being a sine qua non does not get you there, does it, on the authorities?

MR ANSTIS: I am hoping it did, but I accept your Honour’s knowledge.

FRENCH CJ: I am just putting that to you as a proposition.

MR ANSTIS: Yes. Justice Carr further goes on to state, which is on the same page on the paragraph:

I acknowledge that the two concepts of income and allowable deduction are not always in symmetry. The word “income” still has a common law source and a meaning which can be extremely wide. But the statutory concept of an allowable deduction has, deliberately, been narrowly defined so as to require a close nexus with the derivation of income, perhaps a very close nexus.

What I would say is there is a close nexus between producing and gaining income and losses and outgoing. What I would say is that – I will now just turn to the issue of whether, in fact, study is a service to the payer of the youth allowance. Your Honours, even if it was said that the taxpayer must render a service to show the income was gained, it is in fact the case that a study was a service. She benefited society by improving herself through study and by becoming a teacher. Both these things benefit society as a whole. The education expense would be deductible because they were incurred in rendering a service.

The meaning of “service” is also given in the Concise Oxford Dictionary, and this is at page 41 of the documents handed up, as simply “use, assistance; a helpful or beneficial act”. What I would say is that the respondent was involved in a beneficial act for society in general. In this case, at least part of the explanation for the payment was that there was a benefit to both her and the payer of the youth allowance. The benefit to her was that she was not unemployed, but instead received training which enabled her to become a teacher, whilst the benefit for the government was that they were fulfilling their mandate. They did not have to pay her an unemployment. They have instead obtained a teacher. The benefit of there being a teacher to society, I think, is reasonably obvious. There is also a benefit to - - -

FRENCH CJ: The youth allowance is not tied to enrolment of any particular kind, of course.

MR ANSTIS: No, that is right your Honour. I think - - -

FRENCH CJ: So talking about the benefits of teachers to society does not sort of get us there. It may be that you can go this far, to say that the payment of the youth allowance, condition as it is on full-time study, suggests a relationship of encouragement, if you like, of full-time study by the conditions attached to the payment of the youth allowance. But to characterise it as a payment for a service is pulling a pretty long bow, I would have thought.

MR ANSTIS: Well, I am hoping the bow is not too long, but I accept your Honour’s statement. The fact is true, that youth allowance is paid as an encouragement, and there are various speeches that have been attached to my written submissions from the Minister to show that the payment was to encourage study, and it can be seen why study is encouraged I think is a fairly obvious thing to state.

Your Honour, it is in the case of – this is a New Zealand case – Reid v Commission off Inland Revenue 6 TRNZ 495 that you might have a copy of. I have also attached a copy of this case in the respondent’s documents and what I am going to quote from.

GUMMOW J: What are you relying on this case for?

MR ANSTIS: It is only because it is a payment by a government department to a person who was undertaking a course of education and the issue in that case was whether the payment was income. I am not really disputing that it is income, but a few matters did come up including whether there was a service to - - -

GUMMOW J: There was a bond.

MR ANSTIS: It is true there was a bond, but that was one part included and the other part was simply that by attending the teachers college, or whatever was involved, it seemed to be that both matters were involved, the fact there was a bond and the person was studying, which was of benefit to the payer. I do not think it was explicitly stated that the bond is the critical point. I would turn to page 49 of the documents that I handed up which has got just a couple of quotes. The first is, it says that:

Relying on that passage Mr Simcock argued that the amounts paid to student teachers were not paid in respect of any services rendered or in relation to employment, and so were in the nature of a gratuity.

Then it is quoted from the case Louisson v Commissioner of Taxation and Chief Justice Myers, and as I said this New Zealand case, said:

It seems to us that in all the cases where gratuities have been held to be assessable as income there has always been either service or employment, or something in the nature of service or employment, as between the recipient and the donor.

What his Honour goes on to state at page 50 of the documents handed up, he said:

There can be little doubt that what is involved in the present case is income derived from an allowance paid to the objector in respect of his attendance at an educational institution.

So at least there is payment which is connected to the exertion or study of the recipient. That seems to be a critical fact in determining that it was income and I would submit that once it is determined that it is income because of the exertion of the taxpayer, the cost that the taxpayer involves in that exertion would be deductible. Your Honours, the last matter that I will refer to is simply the matter of whether all social security payments are alike. The appellant submitted at paragraph 21 of their written submissions, which is found at page 15 of the book that I handed up, that –

Qualifying for the payment of social security is not, in this respect, a relevant income producing activity. Being unemployed, suffering from a disability or reaching a certain age, are not income producing endeavours although each may represent a criterion for the receipt of a disability support pension, the Newstart allowance or the aged pension. Some forms of social security also include an activity test as one of the criterion –

and then they state that youth allowance is one of these. Your Honours, the question is that, does it follow that because, for example, sickness allowance is not paid to encourage people to be sick or that being sick is not a gaining activity, that youth allowance is not paid to encourage study and that study is not a gaining activity?

I think the answer is obvious, the payments are different. The nature and objectives of the two Social Security Acts are not uniform as is demonstrated by the fact that the Income Tax 1997 does not classify all social security payments in the same way. Social security payments are generally classified under 52-10 but youth allowance is classified also under 52-145 as an education and training payment. This should give some indication that the Parliament considers them to be separate from other social security payments.

Also, as stated payments made pursuant to Social Security Acts can have different objectives and in my written submissions I refer to the second reading speech of the Minister, Ms Gillard, to the Social Security and Other Legislation Amendment (Australian Apprentices) Bill and then the Minister gave tackling climate change and meeting the growing demands for skills as objectives of the Bill.

I also note that the Social Security Act itself, its title is “An Act to provide for the payment of certain pensions, benefits and allowances and for related purposes” which would seem to indicate that income support, if that is one of the purposes of the Social Security Act, is not the sole purpose of the Social Security Act.

Just for a sort of completeness, the fact that an activity or there is an activity test is a gaining activity it will not follow that expenses from the gaining activity will be deductible. An example I have given is for carer’s allowance, when looking after your own children might not be deducted simply because it is a private or a domestic expense or it may be a private or domestic expense.

Similarly, or not similarly, but also in the case of newstart allowance where a person maybe had an activity that is requiring them to undertake

job activities or it may well be the case that they are very limited in what they could actually claim because it would seem to me that there would be strong doubt whether you could claim travelling to the job interview because what actually matters is actually being at the job interview and that does not seem to really incur costs beyond maybe clothes, which also might be a private expense. It could be true that you probably claim for things for the cost of setting up an.....application.

Your Honour, that really concludes my argument, but I will just summarise what I have said. With respect to the subsection 8-1(1) issue, the respondent submits that if it is necessary for all recipients of a particular category of income to undertake some activity or to receive assessable income then that income is gained by that activity. In this case, the respondent could not have received youth allowance if she did not study. Even if a more stringent test is applied and gaining income required to be some benefit to the payer, the respondent has still gained such income because study clearly does provide such a benefit.

Under either meaning of “gaining” the education expenses were clearly incurred in gaining youth allowance which makes them deductible. If the act of study does not provide a benefit and has no cause or role to play then the youth allowance would not be assessable income. With respect to the subsection 8-1(2) issue, the education expense will clearly not have a private or domestic nature, so this will not effect deductibility. Your Honours, this concludes my submissions. Thank you very much.

FRENCH CJ: Thank you, Mr Anstis. Mr Solicitor.

MR GAGELER: Your Honours, to the extent that the respondent suggested a wide view of income should also lead to a wide view of deductibility, we simply refer your Honours to the Full Court’s statement about a submission along similar lines in Mt Isa Mines [1992] HCA 62; 176 CLR 141 at page 152.

To return to a question asked by your Honour Justice Kiefel of me in-chief, where is the provision for cancellation, it is in the Social Security (Administration) Act, section 80, which allows the Secretary to cancel or suspend a determination upon being satisfied that a person is no longer qualified.

Your Honour also asked me generally about analogous cases where undertaking an activity is a qualification for a grant. There are, of course, many analogous cases within the Social Security Act itself. A particularly analogous case which I should mention is newstart allowance, which is governed relevantly by section 593 and section 601 and to qualify for a newstart allowance a person must satisfy the Secretary that the person

satisfies what is called an “activity test”, the activity being essentially looking for work or doing something to gain employment.

Your Honour Justice Gummow asked whether Professor Parsons dealt with section 262 of the 1936 Act in his work. The answer is that he addresses that at paragraphs [2.224] to [2.225]. That is within the extract that we have provided to your Honours.

GUMMOW J: What is the particular passage in Mount Isa Mines, Mr Solicitor[1992] HCA 62; , 176 CLR 141?

MR GAGELER: Yes, just at page 152, your Honours.

GUMMOW J: Whereabouts?

MR GAGELER: In the full paragraph. The point is there is just no connection. Your Honours, the other thing to say about section 262 is that there is no equivalent in the 1997 Act. If the Court pleases.

FRENCH CJ: Thank you, Mr Solicitor. The Court will reserve its decision. The Court adjourns to 9.30 am tomorrow in Sydney and 9.30 am tomorrow in Melbourne.

AT 12.30 PM THE MATTER WAS ADJOURNED