Edited version of private ruling

Authorisation Number: 1011662587265

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: Self-education expenses and non-commercial losses

1. Are you entitled to include a deduction for self-education expenses incurred during the period January 2009 to June 2009 as a deduction against your income?

No.

2. Are you entitled to include a deduction for self-education expenses incurred during the period July 2009 to December 2009 as a deduction against your income?

No.

3. Are you entitled to include a deduction for self-education expenses incurred during the period January 2010 to June 2010 as a deduction against your business income?

Yes.

4. Will the Commissioner exercise his discretion under paragraph 35-55(1)(b) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow you to claim any losses from your business activity in the 2010 income year?

No.

This ruling applies for the following periods:

Year ended 30 June 2009

Year ended 30 June 2010

The scheme commenced on:

1 July 2008

Relevant facts and circumstances

You completed a Bachelor degree in 2008.

In 2009 you undertook a Diploma.

You registered for GST in 2010.

You began working in your field in 2010.

You work up to three days a week in this field of work.

You rent a room for this work. You pay rent at a rate of 40% of fees charged to your clients.

You continue to work as an employee in an unrelated field to supplement your business income.

Since 2010 you have completed additional modules of the Diploma.

You incurred course fees during the period January 2009 to June 2009.

You incurred course fees during the period July 2009 to December 2009.

You incurred course fees during the period January 2010 to June 2010.

The purpose of undertaking the Diploma was to maintain and improve your skills and knowledge and to broaden your income earning activities.

In the future, you intend to be able to offer a range of services in your field of work either as a sole practitioner or in a partnership.

The industry is by nature a part-time industry and involves considerable after hours work.

Demand is influenced by the health of the economy, employment levels and general consumer confidence.

You believe the nature of your business involves long lead times in order to achieve success and profit.

Reasons for decision

Deductibility of self-education expenses January 2009 - December 2009

Section 8-1 of the 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.

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.

In your case, you incurred self-education expenses relating to your Diploma during the period January 2009 to December 2009. During this period you were not gaining assessable income relating to the field of work you were studying. Therefore, the expenses you incurred do not relate to your income-earning activities at the time.

Therefore, you are not entitled to a deduction for self-education expenses incurred during the period January 2009 to June 2009, or during the period July 2009 to December 2009.

As the expense is not a deduction, it cannot be carried forward as a loss and offset against business income in future years.

Deductibility of self-education expenses January 2010 - June 2010

As discussed above, 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.

In your case, you incurred self-education expenses relating to your Diploma during the period January 2010 to June 2010. During this time you were gaining assessable business income in the same field of work you were studying. You undertook this study to maintain and improve your skills and knowledge and to broaden your income earning activities in this field. Therefore, the expenses you incurred relate to your income-earning activities at the time.

Therefore, you are entitled to include self-education expenses as a deduction against your business income.

Commissioner's discretion to not to apply the loss deferral rule

The general rule, set out in section 35-10 of the ITAA 1997, is that where deductions in relation to the non-commercial business activity for that year exceed the assessable income (if any) from the business activity for that year, the excess cannot be deducted in the income year in which it is incurred. Rather, the excess is treated as being deductible from the assessable income from the business activity in the next income year in which the business activity is carried on.

The Commissioner may exercise a discretion not to apply the loss deferral rule in section 35-10 of the ITAA 1997 for one or more income years if satisfied that the application of the rules would be unreasonable (section 35-55 of the ITAA 1997).

The Commissioner can exercise the discretion where the business is just starting and, because of its nature, it has not satisfied, or will not satisfy, one of the four tests although there is an objective expectation that, within a period that is commercially viable for the relevant industry, the activity will either meet one of those tests or will produce assessable income for an income year greater than the deductions attributable to it for that year (section 35-55 of the ITAA 1997).

The taxpayer needs to support the objective expectation that the activity will either pass a test or produce assessable income within a reasonable time using industry information from industry bodies or scientific research if such information is available.

Taxation Ruling TR 2007/6 states that "because of its nature" refers to some inherent characteristic that the taxpayer's business activity has in common with other business activities of that type. The expectation that the business activity will satisfy a test or produce a tax profit within a period that is commercially viable for the industry concerned should be based on independent sources. The "commercially viable" period is the period in which it is expected that any business activity of that type, which is carried on in a commercially viable manner, would be expected to satisfy one of the tests or produce a tax profit.

In your case there is nothing to suggest that there are any inherent characteristics of your industry that indicates there is a long lead time before a business will be commercially viable. Although you are just starting out in the industry, it is likely that your business would be profitable from an early stage. The fact that you have chosen to undertake further study and the cost of this may result in your business making a loss is not sufficient for the Commissioner to grant a discretion to allow you to offset the loss against your other income.

Therefore, you must apply the loss deferral rule and carry forward any losses from your business to offset against business income in future years.