Re: TAXATION APPEALS No. NT87/68-69 AAT No. 4074 Income Tax HRNG SYDNEY #DATE 15:1:1988 ORDER The Tribunal decides that the determinations of the Commissioner upon the objections under review are affirmed. JUDGE1 The Applicant is a lady who is now in her mid-thirties. When she left school at the age of 16 she undertook secretarial studies for a year and, in the two years following, served in a secretarial position. She then travelled overseas to see the world. During the next four years she worked at miscellaneous activities, including selling sets of Encyclopaedia Britannica and serving on tables. She earned enough to provide for her needs. 2. When she returned to Australia she took a position selling life assurance with an Australian Life Assurance Office ("LAO"). Her unchallenged evidence was that LAO provided some instruction as to the characteristics of the "products" which were to be marketed but no significant instruction in the art and craft of selling. She worked from an office provided by LAO but with limited success. Her recollection, unaided by reference to her income tax returns, was that in those early years she was earning gross commissions of the order of $18,000 gross per annum (plus or minus $2,000). Her recollection was faulty. As subsequently appeared when copies of her original tax returns for those years were produced, her gross earnings for the years ended 30 June 1982 and 1983 were $10,603 and $17,966; and her net earnings from those activities (as claimed) $9,498 and $7,297. As there was no suggestion made in the course of the hearing that she was not working diligently in those periods, I find that the earnings that I have referred to were the product of her "full-time" endeavours. 3. By early 1983 she was finding frustrations in her position. She was not being as successful as she would have wished. Her income level was disappointing. That disappointment was made worse by the irregularity in receipt of that income and by the circumstance that tax deductions were being made by LAO based upon expectations - which were quite false - that in high pay periods the amount earned reflected an earning rate typical for the year. She attributed much of her lack of success to two considerations. One was ineffective salesmanship on her part. The other was said to be a prohibition imposed by LAO which prevented her from using the services of sub-agents: persons who, for reward, would arrange to introduce her to possible "customers". As her evidence on the latter point was not challenged, I accept it in so far as it is consistent with other evidence. She further claimed that LAO would only permit her to utilize sub-agents if she conducted her business in partnership or through a body corporate. Why that should have been so was not explained. Whatever the full position as to that may be, in fact she formed a partnership with a mutual friend on 15 September 1983. He made no contribution of any significance to the partnership and it is sufficient to say that the terms of the partnership were that she had a 99% interest and he the remaining 1%. From that point, sub-agents were used more extensively than previously. Further, LAO ceased deducting tax from commissions paid in relation to her work. 4. Neither the Applicant nor the Respondent sought to establish precisely when and to what extent entitlements to increased commissions commenced; or the timing or measure of the flow of commissions which followed. Neither called on LAO to produce its records. The only evidence presented is that appearing in the tax returns which shows that she received salary up to 15 September 1983 and that otherwise all commissions were derived by the partnership. 5. The figures so provided show the following:- SALARY From 1 July 1981 to 30 June 1982 $10,603 From 1 July 1982 to 30 June 1983 $17,966 From 1 July 1983 to 15 September 1983 $33,258 PARTNERSHIP COMMISSIONS From 15 September 1983 to 30 June 1984 $83,329 From 1 July 1984 to 30 June 1985 $90,160 From 1 July 1985 to 30 June 1986 $56,357 6. Why commissions should have fallen substantially in the latter year was not explained. Nor was any explanation offered as to why or when she terminated her career as a life assurance saleswoman. I am satisfied that entitlement to commissions flowed from the completion of proposals by applicants which proposals came to be accepted in due course by LAO; and that, upon or following acceptance by LAO, those proposals led to payment of commissions to the Applicant or her partnership and, then or later, to the payment of remuneration to sub-agents. Having regard to the earnings derived in the periods identified above, I am satisfied that a substantial increase in earning rate commenced with sales which were negotiated significantly before 30 June 1983; with sales which generated some of the assessable income of the year ended 30 June 1984. 7. In July 1983 there was another material development. The Applicant purchased some exercise equipment from a man described as an "executive" - whatever that may mean - employed by a well-known international company. The evidence was that he sold exercise equipment in his spare time. The Applicant was impressed by the ease and effectiveness of his communication and salesmanship. Believing that her own potential as a saleswoman was inhibited by her lack of skills in that regard, she enquired how he had developed the skills he had demonstrated in selling to her. His answer was that he had studied courses presented by the Church of Scientology. 8. With the intention of learning more, the Applicant attended at the premises of the Church of Scientology and, in due course, enrolled in a course of study. That course was to be followed by others. The evidence as to what preceded enrolment was scant but the first in time of the receipts presented in evidence suggests that she paid $10 in order to be assessed as a prospective student. It may be that that was the first exercise in salesmanship: suggesting that only what is paid for is of value to the payer, even if it is more valuable to the payee than the payer. 9. Be that as it may, the $10 was not the last amount to be paid by the Applicant. Before the year of income ended, she had paid in all $30,446 to the Church of Scientology by way of course fees. She paid a further $19,579 in the following year. She claims income tax deductions for the amounts expended. In addition, in December 1983 she paid $3,622 for books, in respect of which she was to claim depreciation. The claim for depreciation of $268 in the 1985 year was disallowed and that too is an issue for determination. If it is true that what is more expensive is the more valuable, she was entitled to expect great things. She enrolled in and studied thirteen of the many courses offered by the Church. When she embarked on the courses she did so with enthusiasm. Her unchallenged evidence was that she often participated in programmed activities for thirty hours a week. Further, she did so while developing her rapidly expanding and increasingly successful business. The available evidence as to what she studied will be considered later. At this point it is appropriate to consider the significance of the fact that the payments were made to the Church of Scientology and to make some general observations as to the presentation of the case. 10. Once the hearing of these references commenced, it quickly became clear that the Applicant and her solicitor, who at that stage appeared for her, were presenting an overly simple view of the issues. It seems to have been thought that her claims as to the courses of study related to two items of expenditure: $30,446 in one year and $19,579 in the year following. It also seems that it was intended that the presentation of her claim was to be based on generalizations that she incurred expense in studying; that the studying led to increased assessable income; and that, therefore, the expenses of study were deductible. At that point I adjourned the matter to enable her claim to be presented so as to enable her to establish the cost and content of each of the courses of study undertaken with a view to establishing entitlement under each head. Upon the resumption of the hearing Counsel appeared and was granted leave to thereafter represent the Applicant. 11. It also seems that the Commissioner's officers also took too simple a view of the matter. That was particularly exemplified by the cross-examination of the witnesses for the Applicant and in the course of the closing address. The Commissioner's representative, in the course of closing argument, sought to argue that the Applicant was not entitled to the deductions claimed in respect of course fees and depreciation because of the identity of the Church of Scientology and of the principles it professed. I was referred (orally only) to extracts from the Encyclopaedia Britannica and to the findings of fact said to have been made in relation to Scientology and the Church of the New Faith in the decisions of the Supreme Court of Victoria in Church of the New Faith v. Commissioner of Payroll Tax (Vict.) 80 ATC 4667; (ibid) 82 ATC 4198; and of the High Court of Australia (ibid) 83 ATC 4652. I reject the submissions as irrelevant. The case is not about the merits of Scientology or the Church of Scientology or of the Church of the New Faith. It is about the claim of the Applicant to income tax deductions arising out of payments made by her, albeit to the Church of Scientology. In addition, in so far as those reports record findings of fact, they merely record the findings of fact made by those Courts on other occasions and in the course of other litigation between other persons. Further, the references to those decisions were not presented in the course of evidence so as to provide the Applicant with an opportunity to test the evidence. 12. I am firmly of the view that the entitlement of the Applicant to the deductions claimed is not to be determined by reference to either the identity or characteristics of the entity presenting the course. Her entitlement would be no more or less if the courses in which she enrolled had been presented by a University (whether public or, having regard to the fees paid, private); or by a major professional body, such as the Australian Medical Association; or by a prominent professional firm, such as some of the more entrepreneurial firms within the profession of accounting. What lies at the heart of the matter is not the social acceptability of the Church of Scientology but rather questions as to the relationship between the expenditure incurred by this lady and the derivation of her assessable income; and the character of the courses undertaken by her. 13. I am satisfied that, when the Applicant enrolled in her first course, one objective at least was to increase her income-earning capacity. I am persuaded that, as she continued her studies, her assessable income - as derived through the partnership - increased; and that the increases secured were wholly attributable to her success in organizing, through sub-agents, opportunities to sell; and then in selling. 14. I accept that her studies contributed to her personal development in ways which gave her a greater self-confidence, which was attended by greater ease and greater effectiveness in the arts of communication. Her demeanour in the witness box demonstrated that. However, I am not persuaded that the increases in assessable income were a consequence only of her newly developed talents. The increases in assessable income, on the evidence before me, quite clearly commenced in a substantial way before any of the courses commenced. 15. But the question to be determined under s.51 of the Income Tax Assessment Act 1936 ("the Act") is not dependent upon establishing that increased income was a direct consequence of the expenditure or wholly attributable to the courses. The costs of an advertising company are not deductible only when it is successful. The significance of evidence which establishes that an increased income flows as a direct consequence of expenditure and from no other cause is that it makes it easier to be satisfied that the expenditure was incurred "in the course of" the derivation of, not an increased level of assessable income, but of "the assessable income" of the Applicant. 16. That being so, one matter of critical importance is to assess the nature and content of each course studied. The courses undertaken by the Applicant were not such that their content could be as readily or easily appreciated as the content of more conventional courses presented by more familiar institutions. The material presented in evidence indicated that the Church has its own vocabulary and "jargon". That in itself is not surprising. Each discipline has its own vocabulary and "jargon". 17. I was presented with evidence from two witnesses as to course content. The first witness was the Applicant. The second was a member of the full-time staff of the Church who had been a full-time officer of the Church for ten years. I will present my findings by reference to the evidence-in-chief given by him. References which appear to fees are to the fees which I accept as having to have been paid in relation to each course. 1. Course 1 - $399.71 - 12 August 1983 - HQS (Hubbard Qualified Scientologist): An intermediate course in the basics of Scientology, dealing in analyses of the mind; of how and why people act; of communication practices; and the application of those practices; 2. Course 2 - $1,000 - 26 August 1983 - Professional Training Routines: A more advanced course dealing with communications; a development from that aspect of Course 1; 3. Course 3 - $10,000 - 6 October 1983 - Saint Hill Special Briefing Course: A yet more advanced course. So described because it was first taught by Mr. Hubbard at Saint Hill in the United Kingdom. A course directed to helping persons to be more effective but involving more than "self-development"; 4. Course 4 - $6,000 - 7 March 1984 - Staff Status 1: A course in administrative and business practices, particularly applying to activities within the Church but appropriate for use in other circumstances unrelated to the Church; 5. Course 5 - $2,000 - 4 April 1984 - Staff Status 2: A more detailed and expanded course in the same area as Course 4; 6. Course 6 - $592.74 - 5 April 1984 - Executive Studies 1: A course in administrative procedures for executives responsible for managing and directing subordinates; 7. Course 7 - $3,835 - Executive Director Full Hat: A course bringing together all practices and procedures appropriate to persons having the responsibility of an Executive Director. (The reference to a "Hat" is a term used to indicate status or function). 8. Course 8 - $2,620 - 11 May 1984 - OT Preps. Eligibility, Solo I. II.; 9. Course 9 - $2,000 - 29 June 1984 - OT 1, II, III: (The staff member did not claim detailed familiarity with these two courses as he had not undertaken them). They were described as advanced level OT courses. OT is defined as:- "1. Operating Thetan, highest state there is; 2. a being at cause (sic) over matter, energy, space, time, form and life." OT Levels are defined as:- "the numbered steps on the Grade Chart above Clear which are done in order on a being's gradient rise toward full OT ability, regenerated and developed by L.Ron Hubbard." "Clear" is defined as:- "an unaberrated person. He is rational in that he forms the best possible solutions he can on the data he has and from his viewpoint. It is a state of mental well-being never before achieved by man". 10. Course 10 - $15,000 - False Purpose Rundown Auditing: a course of counselling conducted with an appointed counsellor who assists the pupil to advance towards self-recognition in a series of "one-to-one" sessions. The course was described in promotional brochures produced by the Applicant as follows:- "This is a most exciting action to run. It blows off the things that stop a thetan, and make him hold back. It unsticks him from major confusions. It puts the person at cause so he doesn't have to do things that are not survival, and handles specific case factors that would keep him from going up The Bridge. It is specifically designed to help a stalled Dianetics Clear. In all cases, it restores reach and greatly increases the expansion potential of a being." 11. Course 11 - $845 - Tapes (money tapes): a series of taped lectures on money and financial and economic systems. 12. Course 12 - $322 - Books (Management Series): a management series of books on aspects of management and administration authored by L.Ron Hubbard. 13. Course 13 - $2,918 - Auditing: a further course of self-improvement; also conducted on a "one-to-one" basis with a counsellor. 18. The staff member's evidence was - and I accept it - that enrolment in and completion of the courses does not always indicate an ambition to advance within the Church. His contention was that many business people use the courses for purposes unrelated to the Church. 19. It is difficult to come to a clear understanding of the nature, purpose and content of the courses. The Applicant sought to rest her case on generalizations that she had participated in the courses with a view to increasing her income; and that her participation in the courses had had that effect. Such generalizations might or might not be sufficient to persuade. 20. However, if a challenge to those assertions by way of cross-examination was to be successful, particularly having regard to the obvious skills that the Applicant has as an experienced and skilled communicator and persuader, it called for a cross-examination based upon detailed instructions as to the subject matter of the cross-examination; mastery of that material; and skill in the art of cross-examination. The conduct of such a cross-examination was not reasonably to be expected from officers of the Commissioner who are not thoroughly instructed and are not well-experienced and skilled advocates. 21. However, before it is necessary for a case to be shown to be unsound by cross-examination, it is first necessary that an applicant should set up a case which, but for such a cross-examination, would persuade. 22. In my view, the case of the Applicant fails by that test. The Applicant has to persuade me that each of the courses undertaken was such that it could fairly be described as having been undertaken "in the course of" deriving assessable income; and as not being "private" in character such as would cause the expense not to be allowable pursuant to the provisions of s.51(1) of the Act. 23. The factors which distinguish learning-experiences which fall in the former category from those which fall in the latter category are not easily or precisely defined. Of expenses in the former category incurred by a senior employed architect who travelled overseas to study developments in architecture, the High Court of Australia said in Commissioner of Taxation v. Finn (1961) 106 CLR 60:- "The money was laid out by the taxpayer in the acquisition of better knowledge of a skilled profession. The pursuit of information concerning the modernization or improvements in an art is part of the constant process of keeping up to date which skilled professions call upon those who practise them to pursue, though sometimes in vain." (Dixon, C.J. at pp.68-69); "(The) professional status (of the office of the applicant) implied an obligation of progressive acquaintance with a living and developing art. It was therefore, I think, plainly incidental to the office that the respondent should avail himself of such opportunities as might arise to add, in the interests of the State even if also in his own interests, to his knowledge and understanding of architectural achievements and trends overseas, both in design and in construction, and of endeavours made and being made to solve architectural problems such as might from time to time concern his Government." (Kitto, J. at pp.69-70); "Generally speaking, it seems to me, a taxpayer who gains income by the exercise of his skill in some professional calling and who incurs expenses in maintaining or increasing his learning, knowledge, experience and ability in that professional calling necessarily incurs those expenses in carrying on his profession or calling." (Windeyer, J. at p.70). The claims were allowed. 24. On the other hand, when Menzies, J. in the High Court of Australia considered the claim of a school teacher seeking a deduction for expenses incurred in studying for an undergraduate degree (F.C. of T. v. Hatchett (1971) 125 CLR 494), he disallowed the claim, saying at (p.499):- "Here, I am not dealing with the general question whether the payment of university fees can ever afford a deduction from assessable income; I am dealing with the particular question whether the fees paid by the taxpayer in the circumstances already stated are deductible. As I have said, I am not able to find any connexion between the payment of fees and the assessable income of the taxpayer beyond the circumstance, which I take to be self-evident, that a teacher who has pursued university studies is likely to be a better teacher than if he had not done so and is therefore more likely to obtain promotion within the department. In my opinion this general consideration is not enough to make the fees deductible;....." 25. The Applicant says that her calling was that of a "saleswoman". Her claim is that studying the art of communication was just as much relevant to her income-earning activities as was any study she might have undertaken as to the "products" she was selling. 26. However, despite those contentions I am persuaded by the evidence before me that the courses undertaken were principally directed to the personal development of the individual and of her capacities and that none of the courses should be characterized as she wished. On balance I accept that she was not seeking growth in spiritual life, such as might have been sought by a disciple of any major religion either for its or her own sake. I am persuaded, on the balance of probabilities, that her principal objective was to increase her wealth by increasing her income. She gave evidence that her ambition had been to earn $100,000 in a year. I accept that, at one point at least during her studies, she came to have that ambition for herself although why she abandoned it or failed to achieve it - as it seems must have happened - was not explained. Even so, as I have understood the evidence presented before me, the courses were directed to providing the Applicant with a sound perception of herself and of her relationships to everyone and everything in creation. It was expected that, if she could succeed in that, then she would be able to more effectively communicate with others and then she would also have a capacity to persuade others to follow courses proposed by her. 27. In the course of argument, reference was made by way of analogy to courses in advocacy undertaken by practising barristers. But the differences are many. Such courses in advocacy - the art of persuasion - do not call for such a commitment in time over so prolonged a period. They certainly do not cost so much, particularly as the teachers are honoured by the office rather than rewarded financially. Further, barristers practice their craft under the control of experienced advocates according to strict standards of fairness and in open confrontation with their rivals. In particular, they seek to persuade an informed audience. But the essential difference for present purposes is that such courses in advocacy do not seek to present to candidates a total view of life. Such serious and fundamental matters are left to others who claim to be better qualified. 28. Self-knowledge and the recognition of one's place in the order of creation have at all times and in all places been propounded as essential to success in life, however that success might be measured. In my judgment the courses here under consideration were conducted at that level and were so closely and deeply involved with the individual person that, in my view, they must be characterized as "private". In Case U189 (87 A.T.C. 1082) I had to consider the much less personal claim of a medical practitioner who suffered such disabilities in oral communication under examination conditions that, over a number of years, he had failed the oral examinations prerequisite to specialist status. He took drama lessons and incurred expense in doing so. Having done so, he immediately succeeded in his oral examinations. I refused his claim to a deduction and in doing so said:- "... I am not persuaded that the expense incurred by this Applicant was not 'private' in nature. The difficulties experienced by the Applicant were highly personal in nature. They were not a function of his professional skill and capacity, but rather personality characteristics which impacted on his professional life. In this instance, they affected it adversely. In my view, the expenses incurred in relation to drama lessons were private in character and are not deductible." In my view, the same conclusion must be reached in this case. 29. In reaching that conclusion I have had regard to the evidence, such as it is, which is before me in relation to each of the courses. I have referred earlier in these reasons to the inadequacy of "generalizations" both as to the character and characteristics of Scientology and to the nature of the courses undertaken. The question to be addressed in each year is not whether the Applicant is entitled to a deduction for the entire sum claimed but rather whether, in relation to the amount expended upon each course, a deduction is allowable. My finding is that there is nothing in the evidence before me which persuades me that the cost of any of the courses studied is allowable as a deduction, and accordingly, the claims to deduct the total cost of those courses fail in their entirety. 30. As to depreciation, it was submitted for the Applicant that, there being no cross-examination touching the evidence given in chief as to that claim, the claim should be allowed. However that, in my view, is a non sequitur. In the circumstances of this case, having regard to the fact that there was no cross-examination on the point, I accept the evidence which was given by the Applicant. But the evidence so given does not persuade me that the Applicant is entitled to the deduction she seeks. I cannot identify the contents of her library by reference to title, author or content. In all the circumstances, the mere generalization that it is a library of books relevant to her income-earning activities is not enough. 31. The determinations of the Commissioner upon the objections under review will be affirmed.