Edited version of private ruling

Authorisation Number: 1011835434926

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Ruling

Subject: Deduction - repayment of foreign scholarship income

Question

Are you entitled to a deduction for the repayment of the scholarship income which was paid by a foreign government to cover your self-education expenses?

Answer

No.

This ruling applies for the following period:

Year ending 30 June 2011

The scheme commences on:

1 July 2010

Facts

You are a professional employed by a firm in Australia.

You obtained a PhD in a foreign country in a field relating to your profession which is directly related to your current work activities.

You received a scholarship, which is called a higher education loan, from a government department of the foreign country. The scholarship income was mainly for the course fees and expenses related to your research work for your PhD.

You began your PhD research work in 200X and completed it in 200Y.

The PhD was completed in close relationship and support of your current employer.

While undertaking your PhD, you came to Australia under a research visa, sponsored by your current employer, as part of your PhD research work. You continued to receive the scholarship income from a government department of the foreign country while you were in Australia. You did casual work in Australia with your current employer, working on a project other than that related to your studies.

A condition of receiving the scholarship was that you were required to work for the government department of the foreign country for a set number of years on the completion of the PhD.

At the completion of the PhD, you did not work for the government department of the foreign country as you decided to come to Australia.

In 200Y, you applied for permanent residency in Australia which was later granted. You then came to Australia.

You worked for your current employer in the foreign country in 200Z.

As a result of the breach of the conditions of the scholarship, you are required to repay the scholarship back to the government department of the foreign country.

The loan has to be repaid within two years. You made your first repayment in 2010 and are now making monthly payments.

You have receipts and supporting documentation.

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 are incurred in earning exempt income.

Self-education expenses

The deductibility of self-education expenses falls for consideration under section 8-1 of the ITAA 1997.

Taxation Ruling TR 98/9 sets out the circumstances in which self-education expenses are allowable as deductions, and states that 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.

Therefore, in considering whether you are entitled to a deduction for the expenses incurred in respect of your repayment of the scholarship income, it is necessary to consider whether the expenses were incurred in the course of producing your assessable income. To be deductible, the outgoings must have the essential character of income-producing expenses.

Contractual repayments

The issue of contractual repayments has been considered in a number of cases.

In Case D19 72 ATC 113, having been awarded a teacher training studentship, the taxpayer entered into the standard form of agreement with the Education Minister. One condition of the agreement was that upon the termination of the course, he was to perform teaching services in any school or schools to which he might be appointed, for a certain number of days. In the event of breach or non-observance of the conditions, the taxpayer would become liable to pay to the Minister on demand a sum equal to the total of all the allowances paid to him by the Minister. The taxpayer failed to observe the agreement and, under its terms, was liable to repay the total amount of the allowances he had been paid. The taxpayer was able to arrange for this amount to be repaid over a number of years. The taxpayer's claim for a deduction for the amount so repaid was disallowed. It was held that the liability to make the payments arose from the breach of the agreement, and was not incidental to the gaining or producing of assessable income. The most that could be said for the payment was that it was expenditure incurred by the taxpayer in choosing between two possible avenues of employment.

Similarly, in Case G80 75 ATC 564, under the terms of his teacher training bond, the taxpayer became liable to repay to the Minister of Education a sum representing the total of all allowances paid to him as a student in training, plus tuition fees. The taxpayer claimed a deduction for the amount repaid, which was disallowed. It was held that the taxpayer was not entitled to a deduction in respect of the repayment to the Education Department. The liability to repay resulted from the taxpayer's breach of the bond agreement and was neither incidental nor relevant to the production of assessable income.

Repayment of foreign scholarship income

You received a scholarship from a government department of the foreign country whereby they agreed to pay your education expenses on condition that upon completion of your PhD studies, you worked for the government department of the foreign country for at least a set number of years.

You did not comply with the conditions of the scholarship as you decided to come to Australia on completion of your PhD research work. As a result of the breach of the conditions of receiving the scholarship, the government department of the foreign country has asked that you repay the scholarship income to them.

In your case, the expenses in relation to the repayment to the government department of the foreign country, are not incurred for income-earning purposes, but are incurred as a result of a breach of the conditions of receiving the scholarship. Your expenses are not incurred to produce income, but to repay a debt to the government department of the foreign country. As in Case D19 and Case G80, the expenses are not incurred in gaining or producing assessable income, and are therefore, not deductible under section 8-1 of the ITAA 1997.