Edited version of your written advice

Authorisation Number: 1051272338932

Date of advice: 23 August 2017

Ruling

Subject: Personal training course

Question 1

Are you entitled to a deduction for the costs incurred for the course?

Answer

No.

Question 2

Are you entitled to a carry forward loss for the costs incurred for the course?

Answer

No.

This ruling applies for the following periods

Year ended 30 June 201Y

Year ended 30 June 201Z

The scheme commenced on

1 July 201X

Relevant facts

You are a full time employee.

You paid money to do a correspondence course. You did the course in 201X.

You were not able to do specific work without completing this course.

You registered a business in 201Y and also acquired an ABN.

You started to see clients in mid 201Y. You work in this field for approximately six to 10 hours/week.

You intend to build up the business as a viable option for the future.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Reasons for decision

Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 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, or a provision of the ITAA 1997 prevents it.

A number of significant court decisions have determined that for an expense to be an allowable deduction:

● 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), and

● 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).

The deductibility of self-education expenses falls for consideration under section 8-1 of the ITAA 1997. Therefore, in considering whether you are entitled to a deduction for your course fees, it is necessary to consider whether the expenses were incurred in the course of gaining or producing your assessable income.

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).

Similarly, 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, a deduction is allowable.

However, no deduction is allowable for self-education expenses if the study is to 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). 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. They are incurred in getting, not in doing, the work which produces the income (High Court decision in FC of T v. Maddalena 71 ATC 4161; (1971) 2 ATR 541).

To determine whether your self-education expenses are deductible, the essential character of the expenditure must be considered. It is necessary to determine whether there is a sufficient nexus between the expenditure and your current income-earning activities. Self-education courses are generally undertaken to further yourself in a position that you already hold.

The following examples provided in TR 98/9 are relevant:

59. Example: Joseph is currently employed as a clerk in a public service department. He would like to transfer to a position in another section of the department and undertakes a course of study designed to equip him with the skills needed in that position. The study is unrelated to the skills required in his current position and is not likely to lead to an increase in income. As the study is designed to enable Joseph to enter a new income-earning activity, no deduction is allowable. …

62. Example: Desiree is a general medical practitioner in partnership with two other general practitioners in a large regional town. She undertakes further study in dermatology in order to set herself up independently as a specialist dermatologist. The expenses related to the study are not allowable as the study is designed to open up a new income-earning activity as a specialist.

In your case you did a course. You were unable to commence your business until you did this course. The cost of the course was incurred for the purpose of gaining skills so that you could commence your business at a later date. That is, your business had not commenced when you did the course and you were not earning any assessable income in that field at that time.

It is acknowledged that the course may benefit you as an employee; however the connection between your course and your employment position is not sufficient. The course was not incurred in gaining or producing your current assessable income as an employee.

Your circumstances are comparable to the above examples outlined in paragraphs 59 and 62 in TR 98/9. That is, the course is to help you start up a new income earning activity. The expenses are incurred at a point too soon to be regarded as incurred in gaining or producing your assessable business income and are not deductible under section 8-1 of the ITAA 1997.

You have stated that this cost was incurred as a start-up cost of your business.

Expenses associated with the purchase or establishment of a business are generally incurred at a point too soon to be regarded as being incurred in carrying on the business and are not allowable deductions under section 8-1 of the ITAA 1997. For example, preliminary expenses on feasibility studies and tests in connection with establishing a paper production mill were held not to be deductible in the Softwood Pulp & Paper v. Federal Commissioner of Taxation 76 ATC 4439; (1976) 7 ATR 101.

The costs associated with the establishment of a business do not relate to the daily activities from which the business gains its assessable income. Any costs related to establishing that business structure are not an allowable deduction under section 8-1 of the ITAA 1997 as they are of a capital nature.

Carry forward loss

The rules for deducting an earlier year loss are set out in subdivision 36-A of the ITAA 1997.

A loss arising in one income year may be carried forward and offset in calculating the net income in future years (section 36-15 ITAA 1997). The losses incurred within an income year are available for carry forward only when allowable deductions exceed the total of assessable income. The losses carried forward from a prior year are first offset against net exempt income in the year in which it is sought to deduct them, with the allowable deductions being limited to the excess.

In your case, the expenses in relation to the course are not an allowable deduction as outlined above. Therefore they are not able to be carried forward to later years when the business is deriving assessable income.

Deferral of losses from non-commercial business activities

Division 35 of the ITAA 1997 applies to losses from certain business activities. Under the rule in subsection 35-10(2) of the ITAA 1997, a 'loss' made by an individual (including an individual in a general law partnership) from a business activity will not be taken into account in an income year unless:

● the exception in subsection 35-10(4) of the ITAA 1997 applies,

● you satisfy subsection 35-10(2E) of the ITAA 1997 and one of four tests in sections 35-30, 35-35, 35-40 or 35-45 of the ITAA 1997 are met, or

● the Commissioner exercises the discretion in section 35-55 of the ITAA 1997.

Your activity will only be potentially subject to Division 35 of the ITAA 1997 if it is carried on as a business. If business losses are not allowed in one year, they can generally be deferred under section 35-10 of the ITAA 1997 to a later year.

If your activity is not yet carried on as a business, then you cannot claim general deductions in relation to it, regardless of the operation of Division 35.

As you did not commence your business activities and provide services for a fee until mid 201Y, the expenses for your course were not incurred as part of your business operations. Therefore such expenses cannot be deferred under Division 35 of the ITAA 1997.

There is no other tax provision that allows a deduction in your circumstances.

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