Commissioner of Taxation v Anstis
Document type: Decision Impact Statement
Venue: High Court (M64 of 2010)
Judgment date: 11 November 2010
Date published: 9 December 2011
Decision outcome: Adverse

Summary of decision:
Outlines the ATO's response to this case, which concerned whether study expenses of a tertiary student were incurred under section 8-1 of the Income Tax Assessment Act (1997 ) (ITAA 97) in gaining or producing Youth Allowance (YA) payments received under the Social Security Act (1991) (SSA), or were otherwise not allowable under paragraph 8-1(2)(b) as outgoings of a private nature.

Overview of facts:
During the 2006 income year, the taxpayer was enrolled as a full time student undertaking a teaching degree at the Australian Catholic University, and received YA payments of $3,622 under the SSA. She also derived $14,946 in income from part time work as a sales assistant. The taxpayer did not derive any income during the relevant year from having worked as a teacher. | In her income tax return for the 2006 year, the taxpayer claimed a deduction of $920 for expenses (travel expenses, teaching supplies, student administration fees, textbooks and computer depreciation) incurred in gaining or producing the YA payments. | Section 540 of the SSA provides that a person is eligible to receive YA for a period if, in addition to satisfying age and residency requirements, the person satisfies the 'activity test' in section 541, i.e., that the person is undertaking full-time study throughout the period. | The AAT (SM Pascoe) decided [2007] AATA 1238 that the expenses were not allowable under section 8-1 because they were unrelated to the derivation of YA income, and because they were merely necessary to put the taxpayer in a position to be able to receive income as a teacher. The essential character of the expenses was to enable the taxpayer to complete a university degree in order to commence to earn income as a teacher (paragraphs 7 and 8). | On appeal from the AAT to the Federal Court, Ryan J decided [2009] FCA 286 that the expenses were allowable as incurred in the course of producing the YA income received. The occasion of the expenses was the need to satisfy the requirements of the SSA for the receipt of the income, and satisfaction of those requirements was what was productive of the income. That the taxpayer's ultimate purpose in undertaking the study was to obtain a qualification leading to future employment as a teacher was irrelevant to the characterisation of the expenses in this case (paragraphs 54, 55 and 62). | On appeal to the Full Federal Court, Finn, Sundberg and Edmonds JJ adopted [2009] FCAFC 154 the reasoning of Ryan J, and found that the taxpayer was paid to undertake her course of study on the condition that she did so in a particular manner and to a particular standard. The expenses were incurred by the taxpayer in the course of undertaking her course of study, and the study, carried out according to the requirements of the SSA, was productive of the YA income. The income-producing activity commenced with enrolment in the course of study and continued during the period that the YA income was paid (paragraphs 40, 44 to 46). | The Commissioner was granted special leave to appeal to the High Court from the decision of the Full Federal Court. Before the High Court, the Commissioner primarily argued that social security payments made under the SSA, such as YA, were income that was conferred on eligible recipients, and not earned, such that no expenses could be incurred in 'gaining' or 'producing' the income under subsection 8-1(1). | The Commissioner was also granted special leave to argue that, if the expenses incurred were allowable under subsection 8-1(1), they were to be disallowed under paragraph 8-1(2)(b) as outgoings of a private nature. Neither the AAT, nor the Federal Court, had considered the application of paragraph 8-1(2)(b). The taxpayer also attempted to argue before the Court that the YA payments were not assessable income. | Issues decided by the High Court | First, while the Court recognised that periodicity of receipt, by itself, will not necessarily be sufficient to give to those receipts the character of income, the fact that the SSA, together with the Social Security (Administration) Act 1999 (SSAA), provided for periodic payment of YA to eligible recipients, in circumstances where the recipients can rely on those regular payments for income support so long as they continue to satisfy the requirements of those Acts, meant that YA payments are ordinary income of the taxpayer. This is consistent with the assumption made in the income tax law until 1985 that, but for being treated as exempt income until that time, payments in the nature of YA were ordinary income (paragraphs 20, 23 and 24). | Second, the Court recognised, contrary to the view of the Full Federal Court, that the taxpayer was not paid the YA income to study - it was not assessable to the taxpayer by reason of any personal exertion or exploitation of property. However, the Court found that the notion of 'gaining or producing' assessable income in section 8-1 is wider than those activities which may be said to earn income, and can be said to extend to 'obtain, secure or acquire'. In this case, the YA income was gained or produced by the taxpayer's entitlement to the payments under the SSA and SSAA. The occasion of her study expenses was to be found in what the taxpayer did to establish and retain her statutory entitlement to the receipts. The motive of the taxpayer in studying to obtain a qualification to undertake future employment as a teacher is not determinative of whether the expenses were incurred in gaining or producing YA income (paragraphs 29 to 31). | Third, the Court found that the expenses were not of a private nature, as they did not lose their connection with the entitlement the taxpayer held as a recipient of YA simply because she might have been studying for reasons other than enjoying the entitlement to YA (paragraph 38)

Issues decided:
First, while the Court recognised that periodicity of receipt, by itself, will not necessarily be sufficient to give to those receipts the character of income, the fact that the SSA, together with the Social Security (Administration) Act 1999 (SSAA), provided for periodic payment of YA to eligible recipients, in circumstances where the recipients can rely on those regular payments for income support so long as they continue to satisfy the requirements of those Acts, meant that YA payments are ordinary income of the taxpayer. This is consistent with the assumption made in the income tax law until 1985 that, but for being treated as exempt income until that time, payments in the nature of YA were ordinary income (paragraphs 20, 23 and 24). Second, the Court recognised, contrary to the view of the Full Federal Court, that the taxpayer was not paid the YA income to study - it was not assessable to the taxpayer by reason of any personal exertion or exploitation of property. However, the Court found that the notion of 'gaining or producing' assessable income in section 8-1 is wider than those activities which may be said to earn income, and can be said to extend to 'obtain, secure or acquire'. In this case, the YA income was gained or produced by the taxpayer's entitlement to the payments under the SSA and SSAA. The occasion of her study expenses was to be found in what the taxpayer did to establish and retain her statutory entitlement to the receipts. The motive of the taxpayer in studying to obtain a qualification to undertake future employment as a teacher is not determinative of whether the expenses were incurred in gaining or producing YA income (paragraphs 29 to 31). Third, the Court found that the expenses were not of a private nature, as they did not lose their connection with the entitlement the taxpayer held as a recipient of YA simply because she might have been studying for reasons other than enjoying the entitlement to YA (paragraph 38)

ATO view of decision:
The High Court has recognised that YA payments are ordinary income in the hands of recipients. In so deciding, the Court appears to have approved the alternative argument presented by the Commissioner in FCT v Stone (2005) 222 CLR 289, at 388, which was left open in that case. It is also consistent with the assumption underlying Divisions 51 and 52 of the ITAA 1997 that other regular payments made under the SSA are ordinary income in the hands of recipients, unless specifically made exempt from income tax under those Divisions. | The ATO recognises that the High Court decided that the non-depreciation expenses were incurred in this case in 'gaining or producing' the YA income received, and were not of a private nature. The ATO accepts that similar expenses would also be allowable under section 8-1 to other full-time students receiving YA income, and to students receiving Austudy and ABSTUDY payments. The ATO also accepts that, in working out whether a full-time student receiving YA income is entitled to deductions for the decline in value of a computer under section 40-25 of the ITAA 97, a taxable purpose in subsection 40-25(8) includes the purpose of producing such income. | Persons who are seeking paid work, but who are not full-time students, also need to satisfy an activity test to be able to receive either YA income or Newstart Allowance (NA) income. Both sections 541 and 601 of the SSA require a person to be actively seeking and willing to undertake paid work in Australia. The ATO accepts that expenses incurred by a recipient of either YA or NA income in actively seeking paid work are also incurred in gaining or producing that income. A taxable purpose in subsection 40-25(8) also includes the purpose of producing YA and NA income when seeking paid work. | However, the ATO also notes that the Court's decision does not extend to meals expenses incurred by recipients of YA, NA, Austudy or ABSTUDY income, and for travelling expenses between a full-time student's home and place of study, whose essential character would still be of a private nature.

Administrative treatment:
Based on comments received on the initial Decision Impact Statement, the ATO considers that no further public advice or guidance is necessary at this stage. | Implications on current Public Rulings & Determinations | The ATO recognises that the views expressed in paragraphs 18, 19, 21 and 71 to 77 of Taxation Ruling TR 98/9 are contrary to the views expressed by the High Court in this case. | In the light of guidance provided by the Court, the ruling was amended on 7 December 2011 by way of an addendum.

Legislative references: Income Tax Assessment Act 1997 4-15(1) 6-5(1) 6-20(1) 8-1 51-1 51-10 51-35 Social Security Act 1991 (Cth) Part 2.11 Division 1 540 541 541B 550 550A(a) 550B 556 1067G 1070A Social Security (Administration) Act 1999 (Cth) Part 3 Division 2 3(2) 23(1) 37(1) 41(1) 43 80(1)
Case references: FCT v Stone [2005] HCA 21 222 CLR 289 2005 ATC 4234 59 ATR 50 FCT v Montgomery [1999] HCA 34 198 CLR 639 42 ATR 475 99 ATC 4749 FCT v Myer Emporium Ltd [1987] HCA 18 163 CLR 199 18 ATR 69 87 ATC 4363 FCT v Dixon [1952] HCA 65 86 CLR 540 Keily v CofT (1983) 32 SASR 494 14 ATR 156 83 ATC 4248 Reid v CIR (1983) 6 TRNZ 494 6 NZTC 61624 CofT v Ranson (1989) 25 FCR 57 20 ATR 1652 89 ATC 5322 Ronpibon Tin NL v FCT [1949] HCA 15 78 CLR 47 FCT v Finn [1961] HCA 61 106 CLR 60 FCT v Hatchett [1971] HCA 47 125 CLR 494 2 ATR 557 71 ATC 4184 John v FCT [1989] HCA 5 166 CLR 417 20 ATR 1 89 ATC 4101 Handley v FCT [1981] HCA 16 148 CLR 182 11 ATR 644 81 ATC 4165 CofT v Cooper (1991) 29 FCR 177 21 ATR 1616 91 ATC 4396 Norman v Golder [1945] 1 All ER 352
Subject references: Assessable income Unearned income Allowable deductions Gaining or producing Private expenses Social security payments Youth Allowance