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Ruling

Subject: Building course expenses

Questions and answers:

1. Are you entitled to a deduction for expenses incurred for membership fees and course fees which will result in a qualification in the building industry?

No

2. Can the membership fees and course costs from part of the cost base of the dwelling when calculating the capital gain or capital loss on sale?

No

This ruling applies for the following periods:

Year ended 30 June 2011

The scheme commences on:

1 July 2010

Relevant facts and circumstances

You purchased a property with a dwelling several years ago.

A few years back the dwelling was demolished and you subdivided the property into a few blocks.

You arranged for the building of a dwelling on one of the blocks which you sold in the 2010-11 income year. You made a gain on the sale of your dwelling.

At the time of the building of the dwelling (building project), you were undertaking a course in the building and construction industry with an organisation. You hope to complete the course shortly.

The organisation required you to be a member in order to receive a discount for its training courses. You incurred course fees and membership fees.

You used some of the knowledge gained from the course in your building project

You are not in the business of building dwellings and selling them. Also you do not earn employment or business income in the field you are studying.

Once you complete your qualification, you plan to apply for a licence in the field of your qualification. You then plan to undertake income earning activities in the building and construction industry with your licence.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 8-1.

Income Tax Assessment Act 1997 Subsection 102-5.

Income Tax Assessment Act 1997 Section 110-25

Reasons for decision

Course and membership fees as a tax deduction

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 relate to the earning of exempt income.

In other words, for a deduction of course expenses to be allowed, the expenditure must be incurred in the course of gaining or producing assessable income. There must be a sufficient connection between the expense and the operations or activities which gain or produce the assessable income.

Self-education expenses

The Commissioners view on the deductibility of self-education expenses is contained in Taxation Ruling TR 98/9. In accordance with TR 98/9, expenses of self-education will satisfy the requirements of section 8-1 of the ITAA 1997 if:

· a taxpayers income-earning activities are based on the exercise of a skill or some specific knowledge, and the subject of 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), or

· there is a direct connection between the self-education and the taxpayers current work activities and the study objectively leads to, or is likely to lead to, an increase in a taxpayers income from their current income-earning activities in the future.

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.

No deduction is allowable for self-education expenses if the study is to enable a taxpayer to get employment, to obtain a new employment or 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.

In your case you are undertaking a course with an organisation which will give you the qualifications to gain employment or business income in the building and construction industry. You have incurred course fees and membership fees. It is considered the expenses you have incurred are at a point too soon. You are not in the business of building dwellings and selling them. Also you do not yet earn regular income from the field in which you are studying.

Once you complete your qualification, you plan to apply for a licence in the building industry. You then plan to undertake income earning activities in your line of qualification. Thus the course fees and membership fees are not allowable as a deduction as they are incurred at a point too soon. By obtaining this qualification, this will open up a new income earning activity.

Course fees and membership fees as part of the cost base

Capital gains tax (CGT) is the tax you pay on any capital gain you make. As you are not in the business of building houses and selling them, the gain which you made on the sale of the dwelling is a capital gain. You make a capital gain where your capital proceeds from a CGT event exceed the CGT asset's cost base.

The cost base of a CGT asset is made up of five elements. They are:

-         First element: money paid for the asset

-         Second element: incidental costs of the CGT event or of acquiring the CGT asset.

-         Third element: non-capital costs associated with owning the asset

-         Fourth element: capital costs associated with increasing the value of your asset.

-         Fifth element: capital costs to preserve or defend your title or rights to your asset.

The costs incurred for the course fees and membership fees do not fall within any of the 5 elements of the cost base. Therefore, the expenses cannot be included in the cost base when calculating the capital gain on the sale of your dwelling.