Edited version of private ruling

Authorisation Number: 1011603334620

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Ruling

Subject: self education expenses

Are you entitled to a deduction for self education expenses incurred in obtaining a licence?

No.

This ruling applies for the following period

Year ended 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts

You are an employee.

You hold a licence and your duties include using this licence to operate machinery.

Your income is based on a fixed base salary, plus a daily rate and commission.

Your employer is encouraging you to obtain an additional licence so that your duties may also include operating other machinery. With this licence you would be able to do more income earning activities and earn additional income.

You expect the training for your licence to take approximately six weeks. You have already completed the theory component of the licence.

You will conduct the training during your annual leave. You will pay for the licence.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1.

Reasons for decision

Question

Summary

Your studies are considered to open up a new income earning activity and not sufficiently connected to your current income earning activities. Therefore, no deduction is allowable for the cost of obtaining your new licence.

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.

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. Federal Commissioner of Taxation (1958) 100 CLR 478; (1958) 11 ATD 404; (1958) 7 ATR 166

· 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 N.L.Tongkah Compound N.L. v. Federal Commissioner of Taxation (1949) 78 CLR 47; (1949) 8 ATD 431; (1949) 4 AITR 236

· 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. Federal Commissioner of Taxation (1956) 95 CLR 344; (1956) 11 ATD 147; (1956) 6 AITR 379; Federal Commissioner of Taxation v. Hatchett (1971) 125 CLR 494; 71 ATC 4184; (1971) 2 ATR 557 (Hatchett's case).

Taxation Ruling TR 98/9 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'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 designed to enable a taxpayer to open up a new income-earning activity, whether in business or in the taxpayer's 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 (see FC of T v. Maddalena 71 ATC 4161; (1971) 2 ATR 541 and paragraphs 15, & 48 - 62 of TR 98/9).

In Hatchett's case, a primary school teacher was not allowed deductions for university fees incurred on an Arts degree course. The university fees had no connection with the activities by which Mr Hatchett gained his income as a primary school teacher. It was not enough that Mr Hatchett's employer encouraged the taxpayer to undertake the course, nor that the course was likely to make Mr Hatchett a better teacher in a general sense.

In your case your current duties include operating machinery and you wish to obtain an additional licence.

A similar situation was considered in Case U14 87 ATC 165. This case concerned two taxpayer's in a partnership that carried on a flying business that operated fixed wing aircraft. When the partnership's income began to decline, the partnership decided to branch out into flying helicopters. The partnership paid for one of the taxpayers to qualify as a helicopter pilot and claimed the cost as a deduction.

Mr Roach (senior member) noted that it is a question of fact and degree, but considered in gaining a helicopter licence, the applicant was acquiring new skills which had a different character to the skills required for flying fixed wing aircraft. Mr Roach held that the helicopter operations were to be a new profit yielding subject and the expense incurred to obtain a helicopter licence was not deductible.

This reasoning can be applied to your circumstances. Your current income earning activities are based on your particular skills. When you obtain your new licence, you will be acquiring new and different skills rather than maintaining or improving your existing income earning skills or knowledge. The acquisition of a new licence will not increase your income from your current income earning activities. Rather with the new skills you will be able to do new and additional work.

As the expenses incurred are more properly characterised as expenses incurred for the purposes of carrying out new duties or opening up a new income earning activity, the expenses are considered to be incurred at a point too soon to be deductible.

It is acknowledged that your employer has encouraged you to obtain your licence. However, this does not automatically mean that your expenses are deductible. Your expenses are not sufficiently connected to your current income earning activities. Consequently, the expenses you incurred in obtaining your licence are not deductible under section 8-1 of the ITAA 1997.