Edited version of private ruling

Authorisation Number: 1011643684650

This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.

Ruling

Subject: Deduction- Self Education expenses

1. Are you entitled to claim a deduction for application and course fees, accommodation, daily living and incidental expenses while undertaking a course of study in country A?

No.

2. Are you entitled to claim a deduction for travel expenses between your accommodation in country A and your workplace in country A?

No.

3. Are you entitled to claim a deduction for travel expenses between your workplace in country A to attend training institutions or other workplaces in country A?

No.

4. Are you entitled to claim a deduction to attend conferences and courses while attending the fellowship in country A?

No.

This ruling applies for the following periods:

Year ending 30 June 2011

Year ending 30 June 2012

The scheme commenced on:

1 July 2010

Relevant facts and circumstances

The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are:

· a private ruling application

· responses to a request for information from the Australian Taxation Office (ATO)

· a copy of the fellowship document.

You have been continually employed with a government department for a long period of time.

You hold professional and specialist skills and are employed.

Your current employment contract will cease and not be renewed with your current employer.

Your employer has not requested you to travel to country A.

You will leave Australia to undertake a course of study in country A.

The course commences after you leave Australia.

The course will involve training, study and research and developing your skills and procedures in your occupation.

You will not receive any remuneration during the course of study.

You will not be performing any services for your current employer while undertaking the course of study.

You are expecting to return to Australia permanently after you finish the course of study.

Your employer and colleagues have supported your decision to undertake the course of study.

You will not receive any allowances or reimbursements for the expenses incurred in undertaking the course of study.

You have been offered a position with a new employer upon completion of the course of study.

You have not signed any formal employment contract or arrangement with your new employer.

You are expected to receive an increase in your income when you take up the new position with your new employer.

You will not be performing any services for your new employer while undertaking the course of study.

You plan to relocate your spouse and children to country A.

You and your family will live in rented accommodation in country A.

You will rent out your family home to assist in paying your mortgage.

You will travel from your rented accommodation in country A to attend your workplace.

You may also be required to travel to other workplaces while in country A to undertake research, and attend meetings.

You are not expected to commence work before leaving home to travel to your workplace in country A.

You will be undertaking study and research from home such as preparing for courses, conferences and presentations in country A.

Your work will be undertaken at your workplace.

You are seeking to claim application and course fees, accommodation, daily living and incidental expenses and travel expenses while in country A.

You intend to take leave to travel to a number of other overseas counties to attend a number of courses or conferences while undertaking the course of study.

You intend to keep the relevant documents to substantiate your claims.

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

The courts have considered the meaning of 'incurred in gaining or producing assessable income'. In 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 the High Court stated that:

For expenditure to form an allowable deduction as an outgoing incurred in gaining or producing the assessable income it must be incidental and relevant to that end. The words "incurred in gaining or producing the assessable income" mean in the course of gaining or producing such income.

The expenditure must, therefore, be related to the production of assessable income and not incurred at a point too soon to be deductible (FC of T v. Maddalena 71 ATC 4161; (1971) 2 ATR 541) (Maddalena's Case).

Taxation Ruling TR 98/9 discusses circumstances in which self-education expenses are allowable as a deduction. 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 Income Tax Assessment Act 1936 (ITAA 1936) the decisions in these cases have equal application to section 8-1 of the ITAA 1997. All references to subsection 51(1) should therefore be taken as including a reference to section 8-1 of the ITAA 1997, and vice versa.

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 (Maddalena's Case).

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.

The deductibility of the expenses you may incur during the course of study needs to be considered under the general self-education principles and relevant case law.

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 used to earn income in their respective current employment positions.

In Finn's case, a senior design government architect went on an overseas tour for the express purpose of studying current trends in architecture with a view to improving his prospects of future promotion. His employer requested him to travel to South America and reimbursed him for some of his expenses. The High Court found that the travel expenses were part and parcel of his employment. That connection was clear because his employer requested him to travel and provided financial assistance. The travel was also likely to lead to promotion. At the time of undertaking and completing the travel, the taxpayer remained an employee of the government department.

Your case can be distinguished from Finn's Case in that your employer did not request you to travel to country A to undertake the course of study or provide any financial support. You will cease your employment with your current employer to take up the course of study in country A and upon completion of the course of study you intend to engage in employment with a new employer. While in country A, you will not receive any income during the course of study or from your current employer. Therefore, any expenses incurred in country A have no connection to your income-earning activities with your current emplopyer. Therefore, it cannot be said that the course of study will assist you in your current income earning activities with your employer.

This was emphasised by Cooper J in m I 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.

Further in FC of T v. Klan 85 ATC 4060; (1985) 16 ATR 176 (Klan's case) the taxpayer, a history teacher, resigned from his employment in Australia and travelled to the United Kingdom (UK) where he obtained a teaching position. The taxpayer also used this opportunity in order to conduct research in Germany and the UK as it would eventually result in qualifying the taxpayer to undertake a postgraduate degree.

The taxpayer argued that the experience gained from overseas, together with the higher degree, would further his career as a teacher in Australia. After a year had passed, the taxpayer returned to Australia and obtained a position as head of the department of history at an independent school. The taxpayer's salary had also increased as a result of his experience overseas.

The taxpayer was disallowed claims by the Commissioner of Taxation pursuant to section 51(1) for airfares and other travelling expenses. The Board upheld the taxpayer's claim and the Commissioner appealed the matter to the Victorian Supreme Court. The Victorian Supreme Court allowed the Commissioner's appeal and the expenses were subsequently disallowed.

Ormiston J. stated in his decision:

It is obvious that the payments were made in a year in which assessable income was earned, but it is equally clear that they were in no way incidental and relevant to the earning of his salary at the Southport School in Queensland. The expenditure was incurred after he had resigned from that post, although perhaps a day or so before he left his teaching post at that school. If they were immediately incidental and relevant to the earning of any income, it was the earning of his somewhat delayed stipend at the Rydal School in Wales.

The circumstances surrounding your travel are similar to Klan's Case in that you will cease employment in Australia and take up a position in country A to engage in a course of study. At the completion of the course of study, you are intending to return to Australia to take up a position with an expectation of receiving an increase in income with a new employer. Therefore, we consider that the principle(s) outlined in Klan's Case are relevant and that you will incur expenses which have insufficient connection with your income from your current employer and that the expenses are incurred at a point too soon to bear any connection with your future engagement with any future employer.

The only other circumstance in which the costs would be deductible is if as a result of undertaking the course of study, it was 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 as you are ceasing your employment with your current employer and are not required to provide any services for your current employer or future employer while undertaking the course of study.

Accordingly, there is insufficient connection between the outgoings you will incur in country A and the gaining or producing of your assessable income from your present employment activities with your current employer. While we acknowledge your intention in undertaking the course of study is to improve your skills and knowledge as a specialist and to gain future employment with your new employer, these facts are not sufficient to make the expenses deductible.

When viewed objectively, the course of study is designed to enable you to obtain new employment. A deduction can only be claimed if the expense is incurred in the course of earning assessable income. In your case, the expenses are incurred when you are not receiving any income in country A and will be incurred at a point too soon to be regarded as incurred in gaining or producing income with any future employer in Australia.

Therefore, you are not entitled to a deduction under section 8-1 of the ITAA 1997.for your travel, accommodation, living expenses in country A, the application and course fees, the expenses to attend courses or conferences in overseas countries or any other costs associated with undertaking the course of study