Edited version of your written advice

Authorisation Number: 1012708285745

Ruling

Subject: Self-education expenses

Question

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

Answer

No.

This ruling applies for the following periods

Year ended 30 June 2013

Year ended 30 June 2014

The scheme commenced on

1 July 2012

Relevant facts

You are an employee.

You are undertaking a personal development course.

The course aims to develop communication skills.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1.

Reasons for decision

Section 8-1 of the Income Tax Assessment Act 1997 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income or are necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income.

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 expense (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 incurred by an employee or a person in business, 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).

To determine whether circumstances exist which would support the deduction for a personal development course we must look to the 'essential character' of the expenditure. It is necessary to determine whether there is a sufficient nexus between the expenditure and the taxpayer's income-earning activities.

In Case U101 87 ATC 616 (Case U101) and Naglost v. FC of T (2001) 2002 ATC 2008; (2001) 49 ATR 1028 (Naglost's case), the Administrative Appeals Tribunal (AAT) considered the deductibility of expenditure on personal development courses.

Case U101 concerned a taxpayer who was employed as a Taxation Office inspector. He undertook a course on communication, clear self-expression and work organisation. The course was not formally recommended or encouraged by his employer but the taxpayer considered it would assist him to carry out his work more efficiently. The AAT denied the claim and held that there was not a sufficient nexus between the expenditure in pursuing the course and the taxpayer's employment.

Conversely, in Naglot's case the AAT allowed a partial deduction to a serving member of the Royal Australian Air Force (RAAF) who undertook a course of study at 'Mastery University'. The taxpayer's duties included management responsibilities and the course of study was designed to enhance leadership, management capabilities and decision-making processes. Further, the course was approved by the taxpayer's employer and some expenses were reimbursed by the RAAF.

The AAT held that the expenditure was allowable as it was considered to be directly relevant to the applicant's role as a manager. The applicant had direct management responsibility for a group of 20 to 25 people and was responsible for the unit's physical training, plus occupational health and safety. Therefore, expenditure on the course was considered to be sufficiently relevant to the taxpayer's income producing activities.

Naglost's case demonstrates that a personal development course will have the 'essential character' of an income-producing expense where a taxpayer can demonstrate a link, not only to skills and knowledge in general, but also to their current duties.

Cases such as Case V13 88 ATC 163 (Case V13) support the view that personal development courses which focus on motivation, personal and human relationship, public speaking, salesmanship and applied psychology are not considered to be incurred in earning the income from a taxpayer's occupation. These expenses are considered to be incurred in developing the taxpayer's personal capacity and experience, personality, self-confidence and self-expression, thus are considered to be private in nature. The expenses are more correctly characterised as those which are necessary to put the taxpayer in a position to carry out the income earning activities.

In Case V13, the taxpayer was a life assurance sales woman. In an attempt to improve her selling skills the taxpayer undertook, at considerable expense, a series of courses in communication, personal development and business skills. The taxpayer's claims for the cost of the course and for depreciation of books were disallowed by the Commissioner and her appeal to the objection was further disallowed by the AAT. In disallowing the claim P M Roach (Senior Member) indicated that he accepted that her studies contributed to her personal development in ways that gave her a greater self-confidence and a greater art of communication and there-by gave her a greater capacity to persuade others to follow courses proposed by her. He stated that despite these contentions, the courses undertaken were principally directed to the personal development of the individual and of her capacities. The courses under consideration were conducted at that level and were so closely and deeply involved with the individual person that they must be characterised as private.

By applying the principles as established in the above cases to your case, it is considered that the expenses of the courses undertaken are not themselves directly attributable to the derivation of your assessable income.

While the studies may be of assistance to you in the performance of your employment duties, it is equally true to say that virtually any experience and the acquisition of any knowledge will contribute to the individuals own development with consequent benefit to the employment duties. There are many experiences which would help in improving relationships with other people, yet expenses incurred in acquiring this knowledge and experience do not become expenses incurred in gaining your assessable income.

We acknowledge that the course may improve your communication skills which can be used in your employment. However, the benefits are largely personal and private in nature.

Accordingly, the expenses for the course are considered to be more related to development of personal capacity which is considered to be private in nature. The course does not have a close enough nexus to your income earning activities and is therefore not deductible.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).