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Ruling
Subject: Repaid education expenses
Question
Are you entitled to a deduction for the amount you were required to repay?
Answer
No.
This ruling applies for the following period
Year ended 30 June 2011
The scheme commenced on
1 July 2010
Relevant facts
You were granted a scholarship from a government department to undertake a course of study.
Under the agreement for the scholarship, the government department paid the cost of the university fees. In return, you were required to work for them for a set period.
When you completed the degree, you chose not to fulfil the agreement.
As a result of not fulfilling your agreement, you were required to pay back the total amount.
Relevant legislative provision
Income Tax Assessment Act 1997 Section 8-1
Reasons for decision
Section 8-1 of the Income Tax Assessment Act 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 relate to the earning of exempt income.
The courts have considered the meaning of 'incurred in gaining or producing assessable income'. In Ronpibon Tin NL & Tong Kah Compound NL v. Federal Commissioner of Taxation (1949) 78 CLR 47; (1949) 4 AITR 236; (1949) 8 ATD 431 the High Court stated that:
For expenditure to form an allowable deduction as an outgoing incurred in gaining or producing assessable income it must be incidental and relevant to that end. The words "incurred in gaining or producing assessable income" mean in the course of gaining or producing such income.
The expenditure must therefore be related to the production of assessable income.
The payment for damages (being repayment of education costs) paid to the government department is not related to the earning of assessable income. The payment represents expenditure incurred by you for breaching the terms of the agreement. Therefore, the expenditure for damages cannot be said to have been incurred as work related expense.
As your liability to repay this amount was neither incidental nor relevant to the production of your assessable income, the damages paid for breach of the agreement is not an allowable deduction under section 8-1 of the ITAA 1997 as it was not incurred in gaining or producing assessable income.