Edited version of your written advice

Authorisation Number: 1051290103800

Date of advice: 4 October 2017

Ruling

Subject: Income Tax- Deductions-Work related expenses – self education expense

Question 1

Are you entitled to a deduction for self-education expenses incurred in association with the attainment of a MBA?

Answer

No.

Question 2

Are you entitled to a deduction for interest incurred on your student loan in association with the self-education expenses incurred with the attainment of your MBA?

Answer

No

This ruling applies for the following period(s)

Year ended 30 June xxxx

The scheme commences on

1 July xxxx

Relevant facts and circumstances

You gained admittance into a tertiary institution.

You became a full time student.

You recommenced fulltime employment after completing your degree.

You are in the same profession that you were prior to completing your degree.

Through the completion of your degree you attribute the opportunity of gaining employment with and the receipt of a substantially higher salary than you received in a similar position as you were previously.

To pay for your degree you received a loan which now must repay.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1936 Subsection 51(1)

Reasons for decision

Summary

You are not entitled to a deduction for your self-education expenses. These expenses were incurred at a point too soon to be regarded as incurred in gaining or producing assessable income while you were a full-time student or in earning future employment income.

Detailed reasoning

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, except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income.

The deductibility of self-education expenses falls for consideration under section 8-1 of the ITAA 1997. 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). The expenses are incurred at a point too soon to be regarded as incurred in gaining or producing assessable income.

A court decision similar to your case is FC of T v. M I Roberts 92 ATC 4787; (1992) 24 ATR 479. Mr Roberts was employed in Australia as a mine manager. After applying on a number of occasions for admission to various overseas MBA programs, he accepted a place at an American university to study full-time for an MBA. Shortly thereafter he was retrenched, with his consent, from his mine manager position and travelled to the US to undertake the MBA. On his return to Australia, he was re-employed as a mine manager by another company at a significantly increased salary when compared with his previous position. However, the Federal Court disallowed a deduction for his expenses associated with the course. The expenses were considered to be incurred at a point too soon to be incurred in earning income from his future employment.

Your situation is similar to that of the taxpayer in FC of T v. Roberts. At the time you undertook the course you were not employed but were participating in a sponsorship program with no guarantee of an employment offer. The expenses of your course of study were incurred at a point too soon to be regarded as incurred in gaining or producing assessable income from your future employment. The expenses were also not incurred in earning the income from your previous employment as that income had already been earned when the expenses were incurred.

Accordingly you are not entitled to a deduction for your self-education expenses under section 8-1 of the ITAA 1997.

Interest deductions

Taxation Ruling TR 98/9 discusses the circumstances under which self-education expenses are allowable as a deduction. Paragraph 23 discusses the types of expenses related to self-education that are allowable. These expenses include interest incurred on borrowed monies where the funds are used to pay for self-education expenses associated with a course of education that enables a taxpayer to maintain or improve his or her skill or knowledge or is likely to lead to an increase in income from the taxpayer's current income-earning activities. However, these expenses are only allowable if the tests under section 8-1 are met.

In your case, the funds borrowed were not used for income producing purposes. The funds that you received were tuition reimbursement and a living stipend which were only repayable if you chose not to return to employment with the same employer. If you decline reemployment, compounding interest would be charged until all monies are repaid.

Your course of study was completed prior to commencing your current employment. As the expense was incurred prior to your current income earning activities this would mean that the interest you are incurring on your loan would not be an allowable deduction. An example discussed in paragraphs 117 and 118 of TR 98/9 is similar to your case:

Example: After completing his secondary education, Alex studied commerce as a full-time student at a private university. He borrowed $30,000 in 1995, repayable over 5 years, and used the funds to pay course tuition fees. He completed his degree the following year and obtained employment with an accounting firm in early 1997. No deduction is allowable for interest incurred on the loan. The funds borrowed were not used for an income-producing purpose, but related to a course of study undertaken by Alex before he obtained his current employment. Accordingly, there is not a sufficient connection between the interest expense and Alex's current income-earning activities.

Therefore you are not entitled to a deduction for your self-education interest expenses under section 8-1 of the ITAA 1997.

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