Edited version of private ruling

Authorisation Number: 1011630770703

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Ruling

Subject: Deduction -self education

1. Are you carrying on a business? 

No.

2. Are you entitled to a deduction for self-education expenses while you were not employed in the aviation industry?

No.

3. Are you entitled to a deduction for expenses incurred on doctor examination fees for the renewal of a licence while working in the aviation industry?

Yes.

4. Are you entitled to a deduction for expenses incurred to renew your Aviation Security Identification Card (ASIC) while working in the aviation industry?

Yes.

5. Are you entitled to a deduction for fees paid to renewal a pilot licence while working in the aviation industry?

Yes.

This ruling applies for the following periods:

Year ended 30 June 2009

Year ended 30 June 2010

Year ending 30 June 2011

The scheme commenced on

1 July 2008

Relevant facts

You were previously engaged in other non aviation employment activities.

Before gaining your commercial pilot licence (CPL) you attended a number of courses, worked voluntarily for the flying club and contacted various aviation entities.

You obtained a CPL a few years ago.

You commenced the flying charter aircraft activites in year one.

You were engaged by a number of aviation entities to fly aircraft.

You invoice each individual entity and receive remuneration for the services you provide to the aviation entities.

You had undertaken a number of individual charter flights in income year two.

You do not have a business plan.

You state you will finish a number of aviation courses and this will enable you to earn income to generate a profit.

You have not provided profit and loss statements.

You initially invest a small amount of capital to purchase assets for the activity.

You do not own or lease any aircraft or property.

Your have provided details of your duties.

The aviation flying contracts ceased in income year one.

You do not advertise your activity.

You have an Australian Business number and a business name.

You do not employ any person in relation to this activity.

You keep business records.

You undertake a number of other income earning activities.

You spent a small number of hours a week on this activity and other income earning activities.

You are expected to pay for any damages to freight that is transported as a result of undertaking the flying activity as you do not have your own business insurance.

You held a number of ratings and endorsements before you had undertaken a number of aviation courses.

You commenced the aviation courses late on income year one and completed the courses early income year two.

You have provided a copy of each course's outline.

Your reason for undertaking courses was to enhance your skills and experience so you can regain business contracts.

You expect to pay course fees and testing fees.

You did not have sufficient funds to complete the aviation courses because you had lost contract work.

You will not receive any allowances or reimbursements for expenses incurred in relation to aviation courses.

You have undertaken the study for the aviation courses in your own time.

During the period you were undertaking the course you were not employed in the aviation industry.

You received government benefits during this time and did other part time work not related to the aviation.

You paid medical examination fees to renew your pilot licence, to renew a security card and to renew a licence.

You are seeking to claim a deduction expenses associated with the two aviation courses.

You intend to keep the required documentation to substantiate your claims.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 8-1

Reasons for decision

Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows you to claim a deduction for a loss or outgoing that is incurred in gaining or producing your assessable income, or necessarily incurred in carrying on a business to gain or produce assessable income. These deductions are limited by the exclusion of losses or outgoings that are capital, private or domestic in nature.

Capital expenses

Expenses of capital, or of a capital nature, cannot be claimed as a deduction under section 8-1 of the ITAA 1997.

An expense will usually be capital in nature where it is incurred with the intention to create an asset or advantage of a lasting and enduring nature (British Insulated & Helsby Cables Ltd v. Atherton (1926) AC 205; (1926) 10 TC 155).

Capital expenditure often produces an enduring benefit, that is, the structure of the advantage or asset. Revenue expenditure is often repetitious or recurring in nature and often does not produce assets or advantages of an enduring nature.

Carrying on a business

There are no hard and fast rules for determining whether your activities amount to the carrying on of a business. The facts of each case must be examined and the determination is based on the large or general impression gained (Martin v. Federal Commissioner of Taxation (1953) 90 CLR 470; (1953) 10 ATD 226; (1953) 5 AITR 548).

However, the courts have developed a series of indicators that you can apply to your circumstances to determine whether you are carrying on a business. Taxation Ruling TR 97/11 provides the indicators established by the courts that would need to be satisfied in order to be considered to be carrying on a business. It should be noted that TR 97/11 specifically deals with the carrying on a business of primary production, but the indicators established can be equally applied to most other activities.

The list of indicators includes, but is not limited to:

· whether the activity has a significant commercial purpose or character

· whether the taxpayer has more than just an intention to engage in business

· whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity

· whether there is regularity and repetition of the activity

· whether the activity is of the same kind, and carried on in a similar manner, to that of ordinary trade in that line of business

· whether the activity is planned, organised and carried on in a businesslike manner such that it is described as making a profit

· the size, scale and permanency of the activity, and

· whether the activity is better described as a hobby, a form of recreation or sporting activity.

No one indicator is decisive. The indicators should be considered in combination and as a whole. Generally, whether a business is carried on depends on the large or general impression given.

Applying the indicators to your circumstances

Does the activity have significant commercial purpose?

The 'significant commercial purpose or character' indicator is closely linked to the other indicators and is a generalisation drawn from the interaction of the other indicators. It is particularly linked to the size and scale of activity, the repetition and regularity of activity and the profit indicators.

A way of establishing that there is a significant commercial purpose or character is to compare the activities with those of a taxpayer who is carrying on a similar activity that is a business and to consider any knowledge, previous experience or skill of the taxpayer in the activity and/or any advice taken by the taxpayer in the conduct of the business.

You gained a commercial pilot licence a number of years ago and commenced flying with a number aviation entities. Before commencing this activity you did voluntary work and contacted various aviation entities to undertaken research into the activity. You had a number of contracted flights up until income year one and then you have only undertaken a small number of flight in income year two.

Intention of the taxpayer

The intention of the taxpayer in engaging in the activity is a relevant indicator; however, a mere intention to carry on a business is not enough. There must be activity. The extent of activity determines whether a business is being carried on. It is a question of fact and degree, as stated by Brennan J in Inglis v. FC of T 80 ATC 4001 at 4004-4005; (1979) 10 ATR 493 at 496-497 (Inglis Case).

This indicator is particularly related to:

· whether the activity is preparatory or preliminary to the ultimate activity

· whether there is an intention to make a profit, and

· whether the activity is better described as a hobby or the pursuit of a recreational or sporting activity.

It is accepted that you have an intention to engage in a business and you have provided your services to various aviation businesses.

Do you have a purpose of profit as well as a prospect of profits?

It is important that the taxpayer is able to show how the activity can make a profit. Stronger evidence of an intention to make a profit occurs when the taxpayer has conducted research into his/her proposed activity, consulted experts or received advice on the running of the activity and the profitability of it before setting up the business. This was the situation in FC of T v. Walker 85 ATC 4179; (1985) 16 ATR 331. However, it is not necessary for the activities to make a profit in every year of income in order to classify the activities as a business. Thus, a taxpayer may be carrying on a business even though he/she is making a small profit or a loss in any given year of income.

You have based your prospects on generating a profit from this activity on the completion of the two aviation courses. While this may improve your prospects of finding employment in the aviation industry and thus securing an income stream, you have not considered any additional expenses that may impact on the operation of the activity such as establishing business premises or purchasing aircraft or leasing aircraft.

Is there repetition and regularity of activities?

Repetition is a significant characteristic of business activities. Repetition refers to the frequency of transactions, or the number of similar transactions.

In your case, you had undertaken a number of contracted flight with general aviation entities which ceased in income year one. Since income year one any further aviation contracts have not been entered into. For income year two you have only undertaken a small number of flights.

Is the activity of the same kind and carried on in a similar manner as other business in that trade? 

It is relevant whether the manner of operation is consistent with industry norms or with businesses in the same field. An activity is more likely to be a business when it is carried on in a manner similar to that in which other participants in the same industry carry on their activities. Lord Clyde in IR Commissioners v. Livingston at TC 542 said that:

... the test, which must be used to determine whether a venture ... is, or is not, "in the nature of trade", is whether the operations involved in it are of the same kind, and carried on in the same way, as those which are characteristic of ordinary trading in the line of business in which the venture was made.

You do not own or lease any aircraft or business premises nor do you advertise your services to the general public. You receive your remuneration as a result of providing your flying skills for a fee to a number of aviation entities

Are the activities carried on in a business like manner?

For example, this may be indicated by:

· business records and books of accounts

· business premises

· licences or qualifications, and

· a registered business name.

You hold a qualification as a pilot, a number of ratings and endorsements to fly a number aircraft. Having a registered business name is not compulsory for tax purposes; having a business name does not necessarily mean you are in business. In addition, the holding of an Australian Business number does not necessarily mean you are in business either.

You operate this activity from home as you do not have an established business premises. You keep business record and spend a small amount of hours on this activity and on other on other income earning activities.

The size and scale of the proposed activities

This factor, of itself, is not decisive. According to TR 97/11 the larger the scale of the activity the more likely it will be that the taxpayer is carrying on a business. However, this is not always the case. A taxpayer can carry on business in a small way: Thomas v. FC of T 72 ATC 4094; (1972) 3 ATR 165, Ferguson v. FC of T 79 ATC 4261; (1979) 9 ATR 873. However, as was said by Brennan J in Inglis Case at 4005: 'At the end of the day, the extent of the activity determines whether the business is being carried on.'

Currently, your activity appears to be in the declining as the extent of any charter flights has been limited due to you not having sufficient skills, experience and the lack of charter contracts available since income year one. 

Is the activity better described as hobby, recreational or sporting pursuit or a business?

Your flying activity is not considered a hobby.

Conclusion

Based on the information you have provided we do not consider that the activity has the necessary characteristics of a business for taxation purposes.

The activity of providing your skills has limited commercial character or purpose. You do not have a business plan and you do not advertise your services to the general public nor do you provide aviation entities. You have invested a small amount of capital and use assets to undertaken the activity.

The amount of activity undertaken since income year one has been irregular and has declined. Your prospects of profits are limited and are dependent on completing two aviation courses to assist in securing future contracts as a result of upgrading your qualifications. You initially devoted small number of hours a week to this activity, however, it appear this has decreased over the income years as the number of contracts has also deceased.

It would be expected that a person engaged in providing aviation services would operate out of business premises, own or lease aircraft, charge a fee to carry freight or passengers, advertise their services to the general public and hold the necessary qualifications and insurances to operate within the aviation industry. However, in your case you have entered into individual contracts and are paid a fee for the services you provide.

Based on the information you have provided we do not consider that the activity has the necessary characteristics of a business for taxation purposes. However, the nature of your engagement may be that of an independent contractor. Where a person in engaged under this type of arrangement the income received as a result of providing their services or labour is assessable income under section 6-5 of the ITAA 1997.

In addition, any expenses that are incurred in relation to this activity may be deductible subject to meeting the requirements under the relevant taxation provisions outlined in the Income Tax Assessment Act of 1936 (ITAA 1936) and ITAA 1997.

Aviation courses

Most self-education expenses are incurred voluntarily and to be allowable under section 8-1 of the ITAA 1997, the expenditure must be characterised as having been incurred in gaining or producing assessable income (Fletcher & Ors v. Federal Commissioner of Taxation (1991) 173 CLR 1; 91 ATC 4950; (1991) 22 ATR 613). 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 Dixon J at p56 indicated that the character of the expenditure is relevant and incidental to the gaining or producing of assessable income.

Taxation Ruling TR 95/19 (TR 95/19) applies to employees in the airline industry and deals with work-related deductions. Paragraphs 109 to 117 of this ruling provide a summary of the key points in respect of the deductibility of self-education expenses, as 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 (AAT). It should be noted that where cases consider deductibility under subsection 51(1) of the ITAA 1936 the decisions in these cases have equal application to section 8-1 of the ITAA 1997. All references to subsection 51(1) of the ITAA 1936 should therefore be taken as including a reference to section 8-1 of the ITAA 1997, and vice versa. 

The cases of Federal Commissioner of Taxation v. Finn (1961) 106 CLR 60; (1961) 12 ATD 348; (1961) 8 AITR 406 (Finn's Case) and Federal Commissioner of Taxation v. Hatchett (1971) 125 CLR 494; 71 ATC 4184; (1971) 2 ATR 557 (Hatchett's case) are the benchmark cases which established the deductibility of self-education expenses. In both cases, the taxpayers incurred the expenses in further developing the skills and knowledge which they currently used to earn income in their respective employment positions.

Self-education expenses are deductible under section 8-1 of the ITAA 1997 where they have a relevant connection to the taxpayer's current income-earning activities. In accordance with TR 98/9, expenses of self-education will satisfy the requirements of section 8-1 of the ITAA 1997 if:

· a taxpayer's income-earning activities are based on the exercise of a skill or some specific knowledge, and the subject of self-education enables the taxpayer to maintain or improve that skill or knowledge, or

· 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 their current income-earning activities in the future.

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

However, no deduction is allowable for self-education expenses if the study is designed to enable a taxpayer to obtain new employment. Such expenses of self-education are incurred at a point too soon to be regarded as incurred in gaining or producing assessable income (FC of T v. Maddalena 71 ATC 4161; (1971) 2 ATR 541).

Therefore, if a taxpayer is not currently engaged or employed in an area that makes the study necessary or desirable, the self-education expenses are not deductible.

Paragraph 65 of TR 98/9 points out that apportionment of expenditure is made when it has been devoted to gaining income as well as some other end. Only those expenses directly attributable to the income earning purpose would be allowable.  

This can apply to the situation when income earning activities have ceased and expenses have been made before and after the period of employment.

In light of the two tests above, what needs to be fully considered is whether the undertaking of the two aviation courses: 

· would contribute to the maintenance or enhancement of the skills and knowledge required in your employment

· would lead to an increase in income while undertaking the aviation courses.

In your case, your gain a CPL and hold a number of ratings and endorsements and work in the aviation industry before undertaking the aviation courses.

Your intention in undertaking the aviation courses was to improve your skills and knowledge to gain qualifications enabling you to improve your employment prospects.

At the time of undertaking the aviation courses no formal contracts of employment were entered into or is there any indication that your were engaged to provide services to the aviation industry.

As you were not engaged in providing services as a pilot at the time the expenses were incurred no connection exists between the expenses incurred and your income-earning activities. Therefore, it cannot be said that the aviation courses assisted you in your then current income earning activities. 

This was emphasised by Cooper J in Federal Commissioner of Taxation v. Roberts (1992) 39 FCR 118; 92 ATC 4787; (1992) 24 ATR 479:

In all of the self-education cases he considered, the taxpayer remained at all times - including before, at, and after the time the outgoing was incurred - in the employ of the same employer. This is not surprising, since it is difficult to sustain an argument that expenditure is "incidental and relevant" to the gaining of assessable income, or that the expenditure has the "essential character" of an income-producing expense, when there is no continuing employment relationship at the time when the expenditure is incurred. Instead, the expenditure has the appearance of an outgoing that is directed towards the getting, rather than the doing, of work as an employee: see for example Commissioner of Taxation v Maddalena (1971) 45 ALJR 426.

In Case U166 87 ATC 957; (1987) 18 ATR 3825 in which it was held that an airline pilot who had retired but wished to continue to derive income from commercial flying was not entitled to a deduction for the cost of a course of flying to obtain endorsement in respect of a particular type of aircraft. In the course of his reasons Dr Gerber said at p. 958:

In short, to come within the purview of sec. 51(1), the cost of better qualifying oneself in point of knowledge or skill must be undertaken either in a current and relevant employment (cf. F.C. of T. v. Finn (1961) 106 C.L.R. 60) or during the subsistence of an associated business undertaking (cf. F.C. of T. v. Highfield 82 Atc 4463).

The circumstances of these cases can be compared to the circumstances in your situation as during the period you were not providing services as a pilot the expenditure associated with the aviation courses were incurred at a point too soon to be regarded as incurred in gaining or producing assessable income, and are not an allowable deduction under section 8-1 of the ITAA 1997.

The only other circumstance in which the costs would be deductible is if aviation qualifications were likely to lead to an increase in your income in your current income earning activities.

In Hatchett's case a deduction for self-education expenses was allowed as the self-education course allowed the taxpayer to earn more in the future and entitled him to be paid more for doing the same work without promotion. At all times the taxpayer was employed by the same employer.

We do not believe that the circumstances of Hatchett's case are relevant to your situation because the taxpayer in that case was employed when he undertook the course of self-education whereas in your case you were not providing pilot services at the time of undertaking the courses. 

Accordingly, expenses for aviation courses cannot be seen to be incurred in maintaining or improving skills that you use in the production of income, or in increasing your income from your present employment activities. Rather, the expenses were incurred when you were not engaged as in the aviation industry and were incurred at a point too soon to be regarded as incurred in gaining or producing income from your current employment activities.  

Therefore, you are not entitled to a deduction for expenses associated with the aviation courses under section 8-1 of the ITAA 1997.

Doctor examination fees for renewal of a licence, the ASIC card and fees paid to CASA to renew your pilot licence

In TR 95/19 at paragraph 23 are some of the common work-related expenses incurred by airline employees and the extent to which they are allowable deductions.

For example:

Licences: A deduction is allowable for the cost of renewing licences held by an airline employee in respect of his or her employment. A deduction is not allowable for the cost of obtaining the initial licence.

Medical examinations for licence renewal: A deduction is allowable for the expenses associated with medical examinations for the renewal of relevant licences. These expenses include the cost of the travel to and from the medical practitioner.

Similarly, the cost associated with gaining an initial security clearance is not deductible. However, where a fee is incurred in the renewal of a security clearance it is deductible under section 8-1 of the ITAA 1997.

In your case, you have incurred medical examination fees, security card renewal fee and fees paid renew your pilot licence. Therefore, you are entitled to a deduction for these expenses under section 8-1 of the ITAA 1997 during the time you were providing service to the aviation industry.