Edited version of private ruling

Authorisation Number: 1011857274922

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Ruling

Subject: self education expenses

Question

Are you entitled to a deduction for the self education expenses?

Answer

No.

This ruling applies for the following period

Year ended 30 June 2012

The scheme commenced on

1 July 2011

Relevant facts

You are a chartered accountant and employed in a firm as an auditor.

Your position is one grade below that of manager and your employer is supportive of your intention to complete a self education course. The leave and time off to complete this course is yet to be determined.

You have always wanted to complete this course as you see it as a self development initiative and also a fast track to management within the audit area of your employment.

The key subjects of the program and how they relate to your employment is as follows:

Leadership: This is critical as you develop in your role at the firm. You are having to manage junior staff and outsourced overseas staff at an increasing rate.

Strategy development and implementation: You are continually taking on new clients and have to develop an approach on how to service them. You are also expected to implement various internal projects at the firm as well.

Marketing: You are expected to market the firm through all your interactions with clients. Bringing in new business and retaining existing business is very important element of working in the firm. Additionally you have at times been involved in assisting with recruitment activities where you are expected to market the firm.

Negotiation skills: This is a key element of your job. You are negotiating fees and additional charges with clients. You also need to negotiate various issues with staff and clients that require delicate handling.

Accounting: This is of direct relevance to you as it is at the core of the work you perform.

Additionally the self-education is likely to lead to an increase in your income in the future from your current income-earning activities.

Reasons for decision
Summary

You are not entitled to a deduction for the expenses you will incur to undertake the course as it is too general in terms of your current income earning activities.

Detailed reasoning

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 or are necessarily incurred in carrying on a business for the purpose of 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.

A number of significant court decisions have determined that, for an expense to satisfy the tests outlined in section 8-1 of the ITAA 1997:

· it must have the essential character of an outgoing incurred in gaining assessable income or, in other words of an income-producing expense (Lunney v. FC of T (1958) 100 CLR 478)

· there must be a nexus between the outgoing and the assessable income so that the outgoing is incidental and relevant to the gaining of assessable income (Ronpibon Tin NL v. FC of T (1949) 78 CLR 47)

· it is necessary to determine the connection between the particular outgoing and the operations or activities by which the taxpayer most directly gains or produces his or her assessable income (Charles Moore & Co (WA) Pty Ltd v. FC of T (1956) 95 CLR 344; FC of T v. Hatchett 71 ATC 4184 (Hatchett's case).

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.

Paragraph 42 or TR 98/9 states:

If a course of study is too general in terms of the taxpayer's current income earning activities, the necessary connection between the self education expense and the income earning activity does not exist. The cost of self-improvement or personal development courses is generally not allowable, although a deduction may be allowed in certain circumstances.

To determine whether circumstances exist which would support the deduction for a personal development course we must look to the 'essential character' of the expenditure. It is necessary to determine whether there is a sufficient nexus between the expenditure and the taxpayer's income-earning activities.

In Case U101 87 ATC 616 (Case U101) and Naglost v. FC of T (2001) 2002 ATC 2008; (2001) 49 ATR 1028 (Naglost's case), the Administrative Appeals Tribunal (AAT) considered the deductibility of expenditure on personal development courses.

Case U101 concerned a taxpayer who was employed as a Taxation Office inspector. He undertook a course on communication, clear self-expression and work organisation. The course was not formally recommended or encouraged by his employer but the taxpayer considered it would assist him to carry out his work more efficiently. The AAT denied the claim and held that there was not a sufficient nexus between the expenditure in pursuing the course and the taxpayer's employment.

Conversely, in Naglot's case the AAT allowed a partial deduction to a serving member of the Royal Australian Air Force (RAAF) who undertook a course of study at 'Mastery University'. The taxpayer's duties included management responsibilities and the course of study was designed to enhance leadership, management capabilities and decision-making processes. Further, the course was approved by the taxpayer's employer and some expenses were reimbursed by the RAAF.

The AAT held that the expenditure was allowable as it was considered to be directly relevant to the applicant's role as a manager. The applicant had direct management responsibility for a group of 20 to 25 people and was responsible for the unit's physical training, plus occupational health and safety. Therefore, expenditure on the course was considered to be sufficiently relevant to the taxpayer's income producing activities.

Naglost's case demonstrates that a personal development course will have the 'essential character' of an income-producing expense where a taxpayer can demonstrate a link, not only to skills and knowledge in general, but also to their current duties.

In Hatchett's case, a primary school teacher was not allowed deductions for university fees incurred on an Arts degree course. The university fees had no connection with the activities by which Mr Hatchett gained his income as a primary school teacher. It was not enough that Mr Hatchett's employer encouraged the taxpayer to undertake the course, nor that the course was likely to make Mr Hatchett a better teacher in a general sense.

Cases such as Case M10 (1961) TBRD 69 (Case M10) and Case V13 88 ATC 163 (Case V13) support the view that personal development courses which focus on motivation, personal and human relationship, public speaking, salesmanship and applied psychology are not considered to be incurred in earning the income from a taxpayer's occupation. These expenses are considered to be incurred in developing the taxpayer's personal capacity and experience, personality, self confidence and self expression, thus are considered to be private in nature. The expenses are more correctly characterised as those which are necessary to put the taxpayer in a position to carry out the income earning activities.

In Case M10, the taxpayer was an agent for a life assurance society. He was denied a deduction for the cost of a Dale Carnegie Course in which he received instruction and training on Effective Speaking, Leadership Training and Human Relations. The prospectus of the course states that the course consists of a combination of public speaking, salesmanship, human relations, personal development and applied psychology. In disallowing the deduction claimed, the member of the Tribunal commented that expenditure by a taxpayer upon development of his personality, self-confidence and self-expression can only be expenditure of a private nature whatever the ulterior purposes may otherwise be served. The course was in the nature of an advanced educational training for people in all walks of life and was private in nature and not allowable as a deduction under section 8-1 of the ITAA 1997.

In Case V13, the taxpayer was a life assurance sales woman. In an attempt to improve her selling skills the taxpayer undertook, at considerable expense, a series of courses in communication, personal development and business skills. The taxpayer's claims for the cost of the course and for depreciation of books were disallowed by the Commissioner and her appeal to the objection was further disallowed by the AAT. In disallowing the claim P M Roach (Senior Member) indicated that he accepted that her studies contributed to her personal development in ways that gave her a greater self-confidence and a greater art of communication and there-by gave her a greater capacity to persuade others to follow courses proposed by her. He stated that despite these contentions, the courses undertaken were principally directed to the personal development of the individual and of her capacities. The courses under consideration were conducted at that level and were so closely and deeply involved with the individual person that they must be characterised as private.

Your course prospectus states that it will provide you with greater self-awareness, a broader strategic understanding of business, and enhanced personal skills. It also states that it will move you from making an individual contribution to creating an environment that inspires others to deliver results and transform yourself from a high potential manager to a high performing leader. The results from the course helps you build a sense of your value, boost your confidence in your managerial knowledge and build your leadership skills. The course brings together individuals from around the world, from vastly diverse job functions, industries and companies.

By applying the principles as established in the above cases to your case, it is considered that the expenses of the course undertaken are not themselves directly attributable to the derivation of your assessable income as a chartered accountant employed as an auditor. The issue of providing you with greater self-awareness, a broader strategic understanding of business, and enhanced personal skills is indicative of an attempt to develop a personal asset that impacts on your professional life. It is not a cost that can be directly connected to the derivation of your income.

While the course may be of assistance to you in the performance of your employment duties, it is equally true to say that virtually any experience and the acquisition of any knowledge will contribute to the individual's own development with consequent benefit to the employment duties. There are many experiences which would help in improving self awareness, a broad understanding business and enhanced personal skills, yet expenses incurred in acquiring this knowledge and experience do not become expenses incurred in gaining your assessable income.

We acknowledge that the course may improve your communication, negotiation skills, personal and interpersonal effectiveness which can be used in your employment. However, the benefits are largely personal and private in nature. As such, the course is considered to be a self improvement course and too general in terms of your current income earning activities.

It is considered that the skills obtained from the course are not unique to your current position and could also lead to an increase in efficiency in many other fields of employment as evidenced in the prospectus statement that the course brings together individuals from around the world, from vastly diverse job functions, industries and companies.

Although improving your personal characteristic may impact on your working life, it is not a cost that is sufficiently connected to your assessable income. Case V13 provides strong support for this view. The statement, from a former participant at page four of the prospectus, that the course was like being invited to a really good dinner party learning new things amongst great company, lends further support to this conclusion. Also the fact that you learn a number of techniques to increase self-confidence, self awareness and improve negotiation skills lends weight to the argument that the course is designed to develop the individual as a person in their entirety.

Accordingly, the expenses for the course are considered to be more related to development of personal capacity which is considered to be private in nature. The course does not have a close enough nexus to your income earning activities and is therefore not deductible under subsection 8-1 of the ITAA 1997.