Edited version of private ruling

Authorisation Number: 1011848329616

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Ruling

Subject: Self Education Expenses

Question

Are you entitled to claim a deduction for the repayment of self education expenses previously paid by your employer?

Answer: No

This ruling applies for the following period

Year ended 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling

You undertook a self education course part time whilst working full time.

You submit that the course allowed you to maintain or improve the specific skills which were required in your employment at the time of the course and afterwards.

Your employer provided you with a loan to cover your study costs. The company provided you with the loan by paying your course fees directly to the educational provider. The agreement between you and your employer provided that if your employment ceases within 24 months of completing the course you would be required to repay the loan to your employer. If your employment ceases between 12 and 24 months after completing the course you would be required to repay 50% of the loan.

You resigned from your employment between 12 and 24 months of the completion date of your masters. On the terms of your loan deed you are required to repay 50% of the degree cost.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Reasons for decision

Summary

You are not entitled to a deduction for the repayment as this amount does not represent self education expenses.

Detailed Reasoning

Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for a loss or outgoing that is incurred in gaining or producing assessable income but not for a loss or outgoing that is of a capital, private or domestic nature.

A taxpayer who incurs expenses relating to self education may be entitled to a deduction for these expenses under this section.

In Ronpibon Tin NL v. Federal Commissioner of Taxation (1949) 78 CLR 47, the High Court of Australia considered the meaning of the phrase 'incurred in gaining or producing assessable income'. In their judgment, Latham CJ, Rich, Dixon, McTiernan and Webb JJ stated:

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. In brief substance, to come within the initial part of the sub-section it is both sufficient and necessary that the occasion of the loss or outgoing should be found in whatever is productive of the assessable income.

Therefore, to determine whether a taxpayer is entitled to a deduction for an expense under section 8-1 of the ITAA 1997 it is necessary to consider the reason the taxpayer incurs the expense.

The Courts, Boards and Tribunals have consistently held that an employee is not entitled to a deduction for an amount they have repaid to an employer pursuant to an agreement which provides that:

· The employer pays the expenses relating to the employee's self education course.

· The employee is required to continue in their employment with the employer for a specified period after completing the self education course.

· If the employee does not continue in their employment with the employer for this period they are required to repay to the employer some or all of the expenses.

They have considered that the amount repaid was incurred by the employee because they breached the terms of the agreement and therefore was not incidental and relevant to the gaining or producing of the employee's assessable income.

A relevant case is Case P20 (1963) 14 TBRD 97 (Case P20). The facts and decision of this case are as follows:

Until 1956 the taxpayer was employed as a survey draftsman with a public department. In that year his application to become articled as a surveyor was accepted by the department. The taxpayer undertook a surveyor's course from 1956 to September 1960. After successfully completing the course he was appointed as a surveyor with the department at an increased salary. Four months later he resigned from the department and accepted an appointment as an assistant engineer with a shire council.

When the department had accepted the taxpayer as an articled surveyor he had been required to enter into a bond with the department. The bond provided that the taxpayer was required to remain with the department for a period of five years after completing his training and that if he failed to do so he was liable to pay to the department a sum of money that was equal to a proportion of the cost to the State of his training but was not to exceed $350.

The taxpayer was required to pay to the department the maximum amount of $350.

The Board of Review No 1 held that the taxpayer was not entitled to a deduction for the amount he paid to the department. In their judgment, the Board members stated:

The expenditure in question flowed directly from the taxpayer's breach of covenant. It was a consequence of the taxpayer's termination of his employment with the department in order to take up duties with a new employer, and even though an increased salary flowed from this move, in no sense can it be said that the outgoing in question was incurred in the course of gaining or producing assessable income from the new source. It was not truly incidental or relevant to the actual derivation of salary income.

Your case

You were required to repay the amount of your study loan to your former employer because they provided the loan to you on the condition that you remain employed with them for a period of 24 months after completing a self education course and you failed to do so. You were required to repay 50% of the degree costs incurred as you left your employment between 12 and 24 months after completion of the degree

Hence, it is considered that the amount you repaid represents damages you were required to pay for breaching the agreement between you and your former employer rather than self education expenses. You breached the agreement as you did not remain employed for the required period of time.

Therefore, you are not entitled to a deduction under section 8-1 of the ITAA 1997 for the amount you repaid.

The decision in Case P20 and the Tax Office's Interpretative Decision ATO ID 2002/902 support this view.