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Federal Commissioner of Taxation v. Hatchett

Facts of the case:
1. Taxpayer was a primary school teacher employed by a State Education Department which had two scales of remuneration scale A & scale B.
2. A teacher who is at scale A (by virtue of higher education) receives higher salary.
3. Taxpayer incurred two type of expenses:
a. Higher certificate fees
b. University tuition fee- the studies stretched over a period of six years
4. Taxpayer claimed both expenses as deduction against assessable income, and the Commissioner declined the deductions.

Commissioner argument:

1. Expense incurred to receive promotion is capital in nature .


Court decision:
Menzies J approved higher certificate fee but declined university tuition fee, and mentioned in his judgment:

1. Human mind capacity is different from capital. None of the expenditure in question can be denied deductibility on the ground that it was an outgoing of capital or of a capital nature.
2. In normal course of business there will be outgoings that are of a capital nature. For example a taxpayer who is a baker buys a van to deliver bread, the emphasise to be on what an outlay provides rather than to the source of what is outlaid. Thus the destruction of the baker's delivery van would provide an instance of capital loss, which is entirely different from destruction of the human mind. Since human capacity is entirely different from ‘capital’, the deductibility cannot be denied because they are outgoings of capital in nature.
3. The possession of higher certificate enabled taxpayer to earn more in the future, the outgoings to be regarded as incurred in gaining assessable income and as not being of a private nature.
4. The university course failed to provide connection between the payments and assessable income beyond the self-evident circumstance that a teacher who has pursued university studies is likely to earn higher income.