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Ruling

Subject: tuition fees

Question

Are you entitled to a deduction for your tuition fees and other self education expenses?

Answer

No.

This ruling applies for the following period

Year ended 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts

You came to Australia on a student visa. Under the student visa you are limited to 20 hours a week work.

You are a resident of Australia for taxation purposes.

You are a postgraduate full-time student.

You are also employed by the University where you study as a casual lecturer for three hours a week. You are a lecturer in the same field as your postgraduate studies.

Without your studies you cannot access full time academic/research jobs at top Australian universities.

You paid tuition fees.

You have now been awarded a scholarship to help with your living expenses.

You have applied for permanent residency.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1.

Reasons for decision

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.

A number of significant court decisions have determined that for an expense to be an allowable deduction:

· 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), and

· 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).

A deduction is only allowable if an expense:

· is actually incurred,

· meets the deductibility tests, and

· satisfies the substantiation rules.

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 postgraduate 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).

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 (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 taxpayer's assessable income from casual work at the university and that the 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 on a student visa and are now undertaking postgraduate studies. You have applied for permanent residency and hope to gain full-time work in your field.

While you may gain some additional knowledge relevant to your casual employment carried out while studying, it is considered that the employment was to support yourself while you undertook the study.

The expenses you incurred for the studies are considered to have been incurred in the pursuit of obtaining your qualifications and to obtain future employment within your field 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 postgraduate studies provides you with knowledge, skills and qualifications over and above those needed to perform the casual work you were 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. It is considered that your study 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.

Therefore, it is considered that your self education expenses are not incurred in earning your assessable income. Rather, they are incurred to enable you to complete your postgraduate studies and to seek better work 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.