Edited version of your written advice

Authorisation Number: 1051470028891

Date of advice: 21 January 2019

Ruling

Subject: Deductions for self-education expenses

Question

Are you entitled to a deduction for self-education expenses for the cost of an MBA course?

Answer

No.

This ruling applies for the following periods

Year ended 30 June 2017

Year ended 30 June 2018

Year ended 30 June 2019

The scheme commenced on

1 July 2016

Relevant facts

You have been employed by one employer, initially as a Maintenance Engineer.

You enrolled in an MBA course at an overseas university.

The course is about General Management.

From the university course curriculum, the main areas of career focus are:

Financial Services

Consulting

Sales/Business Development

Energy/Chemical/Gas

Marketing/PR/Advertising

Consumer Goods

The curriculum further states that you will be studying the same general management curriculum taught in every MBA program from that university, completing a core that spans all the functional areas of a business.

The five concentrations are:

Energy and Environment

Entrepreneurship and Innovation

Finance

Marketing

Strategy

You are incurring expenses for training in business management. The course consists of onsite residential sessions overseas, and distance learning undertaken at home in Australia.

You have undertaken the course for the purpose of gaining new skills (ie management) and new qualifications.

As a result, you became a Project Manager when approaching the end of the course.

Since you started with your employer, your annual salary has increased incrementally.

The course did not relate in a general way to your current employment.

You have not enrolled in the course to get a new employment.

You have been provided with annual paid leave to attend onsite sessions overseas.

To undertake the course, you have incurred over the financial years from 20XX to 20YY, substantial expenses.

You have referred to Taxation Ruling TR 98/9, specifically paragraphs:

13. If a taxpayer's income-earning activities are based on the exercise of a skill or some specific knowledge and the subject of self-education enables the taxpayer to maintain or improve that skill or knowledge, the self-education expenses are allowable as a deduction.

14. If the study of a subject of self-education objectively leads to, or is likely to lead to, an increase in a taxpayer's income from his or her current income-earning activities in the future, the self-education expenses are allowable as a deduction.

15. The fact that the study will enable a taxpayer to get employment, to obtain new employment or to open up a new income-earning activity (whether in business or in the taxpayer's current employment) is not a sufficient basis in itself for self-education expenses to be deductible. This includes studies relating to a particular profession, occupation or field of employment in which the taxpayer is not yet engaged. The expenses are incurred at a point too soon to be regarded as incurred in gaining or producing assessable income.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Summary

Your training is not sufficiently connected to your current employment duties at the time of training. Therefore no deduction is allowed for the costs of the training.

Reasons for decision

Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses or outgoings to the extent to which they are incurred in gaining or producing assessable income, except to the extent that they are outgoings of a capital, private or domestic nature.

A number of significant court decisions have determined that, for an expense to satisfy the tests outlined in section 8-1 of the ITAA 1997:

● it must have the essential character of an outgoing incurred in gaining assessable income or, in other words of an income-producing expenses (Lunney v FC of T (1958) 100 CLR 478);

● there must be a nexus between the outgoing and the assessable income so that the outgoing is incidental and relevant to the gaining of assessable income (Ronpibon Tin NL v FC of T (1949) 78 CLR 47)

● it is necessary to determine the connection between the particular outgoing and the operations or activities by which the taxpayer most directly gains or produces his or her assessable income (Charles Moore & Co (WA) Pty Ltd v FC of T (1956) 95 CLR 344; FC of T v Hatchett 71 ATC 4184 (Hatchett’s case).

Taxation Ruling TR 98/9 Income tax: deductibility of self-education expenses discusses the circumstances under which self-education expenses are allowable as a deduction. A deduction is allowable for self-education expenses if a taxpayer’s current income earning activities are based on the exercise of a skill or some specific knowledge and the subject of the self-education enables the taxpayer to maintain or improve that skill or knowledge (Federal Commissioner of Taxation v. Finn (1961) 106 CLR 60; (1961) 12 ATD 348; (1961) 8 AITR 406).

Similarly, if the study of a subject of self-education objectively leads to, or is likely to lead to an increase in a taxpayer income from his or her current income earning activities in the future, a deduction is allowable.

However, no deduction is allowable for self-education expenses if the study is designed to enable a taxpayer to open up a new income earning activity, whether in business or in the taxpayers current employment. Such expenses of self-education are incurred at a point too soon to be regarded as incurred in gaining or producing assessable income (FC of T v. Maddalena (1971) 45 ALJR 426; (1971) 2 ATR 541; 71 ATC 4161).

If a course of study is too general in terms of the taxpayer’s current income earning activities, the necessary connection between the self-education expense and the income earning activity does not exist.

The curriculum of the university MBA course states that the top areas of career focus are:

Financial Services

Consulting

Sales/Business Development

Energy/Chemical/Gas

Marketing/PR/Advertising

Consumer Goods

The curriculum further states that you will be studying the same general management curriculum taught in every MBA program, completing a core that spans all the functional areas of a business.

You are incurring expenses for training in business management. For these expenses to be allowable they must have a direct connection with your income earning activities at the time you commenced the training, that is, of an engineer.

When you commenced the course, you weren’t employed as a manager.

Changing from your position of engineer to that of manager is a different position.

It is acknowledged that participation in, and completion of, the course increased your income; however it was from a different position.

The course didn’t increase or improve the skills required as a maintenance engineer.

In the case of Assefa v FC of T [2009] AATA 2 (Assefa's case), it was considered whether studying a course of education in order to advance to a higher classification of nursing was opening up a new income earning capacity. The taxpayer in this case was employed as an assistant in nursing and a care service employee while studying a Bachelor of Nursing degree.

The Administrative Appeals Tribunal held in Assefa's case that no deduction was allowable for the self-education expenses. It was determined that there was a significant difference between the position of enrolled nurse and registered nurse on one hand, and personal care assistant/nursing assistant on the other. The taxpayer was not considered to be incurring the expenditure in gaining or producing her assessable income, but was studying towards their initial qualification as a registered nurse.

Although you are in a different field, your case can be compared to Assefa's case in that although the knowledge gained from completing your MBA may be of some assistance to you in your employment as a maintenance engineer, this is merely incidental. Furthermore, the training will provide you with skills and abilities far in advance of those that are required in your current employment duties. Your MBA is not necessary in your employment as a maintenance engineer and it is considered that you will obtain new skills by undertaking the training.

Therefore, it is considered that the MBA course does not have the required connection to your income-earning activities at the time you undertook the course. The knowledge, skills and abilities gained from the training will assist you in opening up a new income earning activity and is not sufficiently connected to your then current duties. The expenses are not being incurred in the course of gaining or producing your assessable income.

Accordingly, you are not entitled to a deduction for expenses incurred in doing your MBA under section 8-1 of the ITAA 1997.

You have referred to Taxation Ruling TR 98/9, specifically paragraphs13 to 15.

13. If a taxpayer's income-earning activities are based on the exercise of a skill or some specific knowledge and the subject of self-education enables the taxpayer to maintain or improve that skill or knowledge, the self-education expenses are allowable as a deduction.

Your income earning activities at the time of your study for the MBA were that of an engineer, and were based on the exercise of a skill or specific knowledge.

The content of your MBA did not enable you to maintain or improve that skill or knowledge.

14. If the study of a subject of self-education objectively leads to, or is likely to lead to, an increase in a taxpayer's income from his or her current income-earning activities in the future, the self-education expenses are allowable as a deduction.

The key words in paragraph 14 are ‘current income earning activities’, and the MBA does not lead to an increase in your income from your income earning activity as an engineer.

15. The fact that the study will enable a taxpayer to get employment, to obtain new employment or to open up a new income-earning activity (whether in business or in the taxpayer's current employment) is not a sufficient basis in itself for self-education expenses to be deductible. This includes studies relating to a particular profession, occupation or field of employment in which the taxpayer is not yet engaged. The expenses are incurred at a point too soon to be regarded as incurred in gaining or producing assessable income.

The position of manager is one in which you were not yet engaged at the time of your MBA course, and so the expenses were incurred at a point too soon to be regarded as incurred in gaining or producing assessable income.