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Ruling

Subject: Deduction-self-education expenses

Question 1:

Are you entitled to claim a deduction for your self-education expenses?

Answer:

No.

This ruling applies for the following periods

Year ended 30 June 2012

Year ending 30 June 2013

The scheme commenced on

1 July 2011

Relevant facts

You hold a degree.

You commenced employment with a business.

You duties are of an analytical and technical nature.

You have on occasions undertaken a leadership and mentoring role.

Your employer provided you with leave without pay to undertake a self-education course.

You intention is to return to your employment after you return from leave.

Your reasons for undertaking the self-education course were to further your career by improving your skills in management and to facilitate a future promotion.

You believe the self-education course is directly related to your employment duties.

You resided in city B in Australia.

You leased a property for a period before travelling overseas.

You terminated this lease before travelling overseas.

You left to undertake the self-education course in country A.

Your partner accompanied you to country A for a short period and then returned home to live in Australia.

You lived in rented accommodation in country A.

You did not undertake any employment during this period.

You did not receive any income from your employer while undertaking the self-education course.

You did not receive any allowance or reimbursement from your employer for any expenses, while undertaking the self-education course overseas.

You are expecting to return to Australia in the future.

You paid for the self-education expenses from your savings.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1.

Reasons for decision

Self-education expenses are generally considered under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997). This section allows a deduction for losses and outgoings which are incurred in the course of gaining or producing assessable income, unless the losses or outgoings are capital, or are of a capital, private or domestic nature.

The general test is that there should be a clear connection between the expense and the gaining or producing of assessable income from a profession or employment. Consequently, it is necessary to determine the connection between the particular outgoing and the operations by which the taxpayer more directly gains or produces his or her assessable income (Charles Moore & Co (WA) Pty Ltd v. Federal Commissioner of Taxation (1956) 95 CLR 344 at 349-350; (1956) 11 ATD 147 at 148; (1956) 6 AITR 379 at 384; FC of T v. Cooper 91 ATC 4396 at 4403; (1991) 21 ATR 1616 at 1624; Roads and Traffic Authority of NSW v. FC of T 93 ATC 4508 at 4521; (1993) 26 ATR 76 at 91).

It is a long standing principle that a taxpayer does not satisfy section 8-1 of the ITAA 1997 merely by demonstrating a casual connection between the expenditure and the derivation of income. What must be shown is a closer and more immediate connection. The expenditure must be incurred in gaining or producing your assessable income (Lunney v Commissioner of Taxation (1958) 100 CLR 478). These principles have been affirmed by the High Court in Commissioner of Taxation v Payne [2001] HCA 3 (Payne's case).

The Commissioner's view on the deductibility of self-education expenses is contained in Taxation Ruling TR 98/9. These guidelines have been established through the views taken by the Courts, Boards of Review and Administrative Appeals Tribunals.

The cases of Federal Commissioner of Taxation v. Finn (1961) 106 CLR 60 and Federal Commissioner of Taxation v. Hatchett (1971) 125 CLR 494 are the benchmark cases which established the deductibility of self-education expenses. In both these cases, the taxpayers incurred the expenses in further developing the skills and knowledge which they currently used to earn income.

TR 98/9 discusses the application of the deductibility tests on the issue of self-education expenses. In practice, the following principles do not always operate on a mutually exclusive basis. It is always necessary to have regard to the words of section 8-1 of the ITAA 1997 and apply them to the facts.

Firstly it considers whether the expenses are incurred in the course of gaining or producing assessable income, that is the nexus between the expense of the course of study and the income. The next test is whether the course of study will realistically lead to an increase in income from those same activities, not from different employment.

However, if the course of study leads to a new employment or to a change in occupation, the expenses would be considered to be incurred at a point too soon to have a nexus with future income and would not be deductible. In those situations, the expenses are incurred in acquiring new skills to apply to new employment activities.

Whether such a connection exists is a question of fact to be determined by reference to all the facts of the particular case.

However, where 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 cost of self-improvement or personal development courses is generally not allowable, although a deduction may be allowed in certain circumstances.

TR 98/9 states:

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. (paragraph 42)

In light of the two tests above, what needs to be fully considered is whether the undertaking of the self-education course would contribute to the maintenance or enhancement of the skills and knowledge required in your employment.

In your case, a review of duties indicates you role is of analytical and technical nature and we consider that it is from these duties that you gain or produce your assessable income and that any outgoing or expenses incurred must directly relate to your duties.

It is acknowledged you have undertaken additional responsibilities in your position on occasions the undertaking of the self-education course principally deals with management of a business. Whilst your position requires some business knowledge clearly your main duties are of an analytical and technical nature. It is considered that with the degree you already hold and your work experience, you already have the skills and abilities to effectively carry out your duties with your employer.

The self-education course is not regarded as having a relevant connection to your current employment because the self-education course will provide you with a variety of new skills and a qualification that is far in excess of the requirements of your current position and therefore cannot be said to be incurred in maintaining or improving skills that you rely on in performing your duties with your current employer.

You have also advised that after you have completed the self-education course it is expected that you will be promoted to a higher position. However, from the information you have provided there in no information to support this contention. In addition as a result of undertaking the self-education course there is no indication your salary has or will increase with your employer.

In conclusion after applying the above principles to your circumstances and the facts, it is considered that there is insufficient nexus to your income earning activities and self-education course. The self-education course you are undertaking is orientated more towards furthering your career or changing its direction than it is with carrying out the duties associated with the position held at this point of your career. Its focus is not so much on equipping you to better carry out the duties but to put you in a position where you can progress well beyond your current position. For these reasons noted above, your self-education expenses are not considered to have been incurred in the course of gaining your assessable income.

Accordingly, your self-education expenses are not an allowable deduction under section 8-1 of the ITAA 1997.

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