Edited version of private ruling

Authorisation Number: 1011694334514

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Ruling

Subject: self education expenses

Question

Are you entitled to a deduction for your self education fees?

Answer

No.

This ruling applies for the following period

Year ended 30 June 2006

Year ended 30 June 2007

Year ended 30 June 2008

Year ended 30 June 2009

Year ended 30 June 2010

The scheme commenced on

1 July 2005

Relevant facts

You came to Australia on a student visa.

You studied towards your PhD.

While you were studying, you were working casually in a related field. You signed contracts on a term by term basis. On average you worked between 8 to 12 hours per week.

Your overseas employer supported your study partially. You were provided with unpaid leave and your tuition fee was paid by your employer for the first 6 terms. The agreement with your overseas employer was that you would go back and work for them for at least seven years, otherwise you would have to pay back the money.

Your employers in Australia did not support your study.

You were a full time student and studied in your own time.

You paid part of your university fees in a previous income year to extend your student visa.

You understood that your university fees would be waived.

However, in the income year, you were required to pay the remaining fees.

The fees were not HECS.

Before coming to Australia you had worked overseas in your chosen field for several years.

Although you had a Masters degree, you realised that a PhD would improve your knowledge and ability in relation to your career.

Your research and the added knowledge opened up paths for you to get more work.

You now hope to stay and work permanently in Australia with your family.

You are currently on a bridging visa and waiting for your permanent residency visa to be processed.

You will pay back the overseas employer the tuition fee they previously paid.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1.

Reasons for decision

Summary

Your expenses are considered to have been incurred in the pursuit of obtaining your qualifications and to obtain future full time permanent employment 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 expenses were 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 PhD, 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).

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 taxpayer's 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 PhD studies, 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 (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 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 Commissioner's 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.

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. They found that on completion of the degree, 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 taxpayer's 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 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 for your PhD. Your original agreement with your overseas employer was to return and work for them for at least seven years. You are now hoping to stay and work permanently in Australia.

It is acknowledged that you may have gained some additional knowledge relevant to your employment carried out while studying. However, it is considered that the employment was to support yourself while you undertook the study.

The expenses you incurred for the PhD are considered to have been incurred in the pursuit of obtaining your qualifications and to obtain future full time permanent employment 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 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. It is considered that your study was to enable you to obtain qualifications that would allow you to secure full time employment and a more highly paid position at a later date.

Therefore, it is considered that your self education expenses were not incurred in earning your assessable income. Rather, they were incurred to enable you to complete your PhD and to seek better work in your chosen field. As such, the expenses were 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.