Edited version of private ruling

Authorisation Number: 1011672888913

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Ruling

Subject: self education expenses

1. Are you entitled to a deduction for self education course fees?

No.

2. Are payments received under the loan scheme regarded as target foreign income when calculating your adjusted taxable income?

No.

This ruling applies for the following period

Year ended 30 June 2010

The scheme commenced on

1 July 2009

Relevant facts

You came to Australia to undertake work and studies.

You came on a student visa which expires on 30 August 2011. You hope to extend your visa and remain in Australia.

You are an Australian resident for tax purposes.

You commenced employment.

You are currently casually employed and work 20 hours a week which is the maximum you can work under your visa.

You commenced your course as a full time student in 2010. You hope to complete this course in June 2011.

You completed your degree and are doing your Masters to help broaden you knowledge within this field. The course will allow you to work within the industry.

The knowledge you gained from the course allows you to manage the different systems and have a deeper understanding of the intricate systems that you deal with on a daily basis at your current employment.

Your employer allows you time off where necessary for exams and study.

You study in your own time.

You incurred course fees.

To fund the course a scheme was used. This is a funding method for overseas students.

The scheme was used to fund part of your course fees for the two semesters. The balance of your course fees came from family monies.

You have started to repay the loan.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1.

Reasons for decision

Summary

The essential character of your self education expenses is to enable you to complete your studies and begin a career in your chosen field, not to advance your career with your current casual employment. The expenses are incurred at a point too soon to be regarded as being incurred in gaining or producing your assessable income and are therefore not an allowable deduction.

Detailed reasoning

Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses and outgoings 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. Therefore, in considering whether you are entitled to a deduction for the costs incurred in undertaking your studies, it is necessary to consider whether the expenses were incurred in the course of gaining or producing your assessable 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 (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 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). This includes studies relating to a particular profession, occupation or field of employment in which the taxpayer is not yet engaged. The expenses are incurred at a point too soon to be regarded as incurred in gaining or producing assessable income. They are incurred in getting, not in doing, the work which produces the income (High Court decision in FC of T v. Maddalena 71 ATC 4161; (1971) 2 ATR 541).

The Commissioner also considers that if short term or casual employment is gained after the commencement of a course of education, expenses in relation to the course will not be deductible, even if the employment does have some connection with the course of self education. In such circumstances, it is considered that the requisite connection between the expenditure and the assessable income is absent, as the expenses of self education are incurred to gain a qualification. The self education is not being undertaken to maintain or improve a taxpayers employment skills.

Paragraph 55 to 57 of TR 98/9 gives examples of industry placement and casual employment taken by university students while studying. The examples state:

Example: Stuart wants to be the manager of a hotel. He enrols in a hotel management course, one semester of which involves an industry placement to gain work experience. Stuart is placed with a major hotel where he gains experience in all facets of hotel management, including catering, housekeeping and bar work. He claims a deduction for the cost of the course against income earned during the placement.

A deduction is not allowable because the study is designed to get Stuart employment as a hotel manager, not derive income from work experience. It is incurred at a point too soon to be regarded as incurred in gaining or producing assessable income.

Example: Shannon, who is undertaking a 4-year university degree in mining engineering, takes a job as a casual employee with a mining company during the end of year holiday period. It is the company's policy to take only students who are pursuing relevant studies. Shannon is not entitled to a deduction for the cost of the course because the study is designed to get future employment in the field. It is incurred at a point too soon.

To determine whether your self education expenses are deductible, the essential character of the expenditure must be considered. It is necessary to determine whether there is a sufficient nexus between the expenditure and your current income-earning activities.

In Lloyd v. FC of T [2006] AATA 105; 2006 ATC 2057, the taxpayer came to Australia to commence her PhD in Interactive Media and Telecommunications at a university. She was registered with two employment agencies, through which she took on the role of administration/research assistant with various companies, including a bank.

The Commissioner disallowed the claim on the basis that it was not incurred in the gaining or producing of her assessable income. The taxpayer sought a review of this decision. She contended that her hourly rate of remuneration at the bank increased as a result of her PhD studies. As such, there was a perceived connection between her expenses claimed and the increased income she received from the bank as a result of her promotions. In relation to her later project administration and management roles with two other companies, she submitted that these did not involve new income-earning activities. The self education expenses were incurred to enable her to maintain or build upon her learning, knowledge and experience that she gained in her earlier qualifications.

The Administrative Appeals Tribunal (AAT) found that her self education expenses were not deductible. It was held that the taxpayer's purpose in undertaking employment was to support her study for PhD, and her purpose in undertaking the PhD was to enhance and expand on her knowledge in the IT and telecommunications fields so that she could ultimately obtain more highly paid positions. The taxpayer did not undertake her PhD studies to improve her proficiency in the various positions in which she was placed by the employment agencies.

It was held further that the expenses were not incurred in the course of gaining or producing the taxpayer's assessable income from her work with the bank. She was employed by the employment agencies and the remuneration she received was paid by those agencies to her as an employee. The expenses were incurred at a point too soon to be properly regarded as incurred in gaining assessable income.

Similar views have been expressed in Gupta v. FC of T 2002 ATC 2319; (2002) 51 ATR 1205 (Gupta's case); (2002) 51 ATR 1205 ; Tobias v. FC of T 98 ATC 2115, Pujara v. FC of T (2003) AATA 331 and more recently in Cheung v FC of T [2008] AATA 220; 2008 ATC 10-011 and Amuthalan v. FC of T [2008] AATA 818.

The issue of self education expenses and casual employment was considered in Gupta's case. In this case the taxpayer was an Indian citizen who arrived in Australia in July 1997 (then aged 19) on a student visa, with restricted work conditions. While in India, he attained a Certificate of Proficiency in Information systems and had worked as a trainee technical assistance with mainly data entry responsibilities. The taxpayer enrolled in the Bachelor of Computer Science course at the University of Western Sydney. From about March 1998, the taxpayer also began working on a casual basis at the university's School of Computing and Information Technology as a computer laboratory assistant. After completing his course he remained in the employ of the university as a tutor and researcher. The taxpayer sought deductions in the 1999 and 2000 tax years in relation to his self education expenses. The Commissioner denied the claims.

The taxpayer objected to his assessments and claimed he was maintaining or improving his skills necessary for his work and there was a direct connection between the expenditure and assessable income. However, the Commissioner claimed that the expenses were incurred to enable him to gain his degree and were not incurred in the process of earning his assessable income as a part time employee.

The Commissioners decision was affirmed by the AAT. The AAT held that the essential character of the expenses was to qualify the taxpayer so that he could get ahead within the IT industry to a more highly paid position.

They found that on completion of the degree, however, the taxpayer would have acquired more highly developed skills, qualifying him to undertake more responsible and demanding work than previously. It was held that the expenses were not incurred in gaining or producing the taxpayers assessable income from casual work at the university that income was merely incidental to the studies. The expenses were incurred in getting future work, and they came at a point too soon.

The Tribunal rejected the submission that the applicant enrolled in the course so that he could be more proficient at the type of duties he had performed in the past. The expenses were not incurred in gaining or producing the taxpayer's assessable income from casual work at the university that income was merely incidental to the studies. The perceived connection between the self education expenses and Mr Gupta's assessable income was absent. Accordingly, the expenses were of a non-deductible private nature.

In Case VT 90/257, AAT No 7086, the Senior Member found that a student employed as a design assistant studying an interior design course was not entitled to a deduction for self education expenses. In that taxpayer's circumstances, the member found the course was the prime object and their employment was simply to provide support during the study. The fact that they worked in the same industry as that of their course was not decisive in this case.

In Case Z1 92 ATC 101; AAT Case 7541 (1991) 22 ATR 3549, a public service clerk studying for a law degree later obtained a legal officer position in the public service. Such expenses of self education were incurred at a point too soon to be regarded as incurred in gaining or producing assessable income.

In your case, you came to Australia to study. You subsequently obtained employment in a related field as your study. As the course had not actually commenced when you were employed, it is clear that you were given the job based on your previous skills and qualifications. It is acknowledged that you may gain some additional knowledge relevant to your employment. However, it is considered that the employment was to support yourself while you undertook the study.

The expenses you incurred for the Masters course are considered to have been incurred in the pursuit of obtaining your qualifications and to obtain future employment within the industry and not in gaining or producing your assessable income from the casual work you performed while studying. The income you earned from your casual work was merely incidental to your studies. The study provides you with knowledge, skills and qualifications over and above those needed to perform the casual work you are currently undertaking.

The fact you obtained employment in a related industry as that of your study is not considered decisive. Rather, your circumstances are more aligned to those in Gupta's case, in that you were studying while working part-time performing administrative and other work for your employer. It is considered that your study was not to enable you to maintain or improve skill or knowledge in a profession you were already engaged in, but was to enable you to obtain qualifications that would allow you to secure a full-time employment and a more highly paid position at a later date in the relevant industry.

Therefore, it is considered that your self education expenses are not incurred in earning your current assessable income. Rather, they are incurred to enable you to complete your study and to begin a career in your chosen field. As such, the expenses are incurred at a point too soon to be regarded as incurred in gaining or producing your assessable income and are not deductible under section 8-1 of the ITAA 1997.

Target foreign income

In determining whether a person is entitled to a spouse tax offset, it is necessary to calculate the relevant adjusted taxable income.

Your target foreign income is included in your adjusted taxable income.

Target foreign income is:

· any income earned, derived or received from sources outside Australia

· a periodical payment by way of gifts or allowances from a source outside Australia, and

· a periodical benefit by way of gifts or allowances from a source outside Australia

that is not taxable income nor received in the form of a fringe benefit.

The funds you received under the loan scheme are not considered to be periodical gifts or allowances. Therefore we need to consider whether the funds are regarded as income.

Under subsection 6-5(1) of the ITAA 1997 an amount is assessable income if it is income according to ordinary concepts (ordinary income).

Ordinary income has generally been held to include three categories, namely, income from rendering personal services, income from property and income from carrying on a business.

Other characteristics of income that have evolved from case law (Federal Commissioner of Taxation v. Dixon (1952) 86 CLR 540; (1952) 10 ATD 82; (1952) 5 AITR 443; (1952) 10 ATD 82) include receipts that:

· are earned

· are expected

· are relied upon, and

· have an element of periodicity, recurrence or regularity.

Your payments under the loan scheme do not have an element of recurrence or regularity. Although the payment can be said to be expected, and perhaps relied upon, this expectation does not arise from a relationship to personal services performed. The loan which you are repaying is not ordinary income and is therefore, not assessable under section 6-5 of the ITAA 1997.

The loan money is not regarded as income under any other provision in the ITAA 1997. Therefore, the loan money is not regarded as target foreign income.