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Ruling

Subject: self education expenses

Question

Are you entitled to a deduction for self education expenses?

Answer: No.

This ruling applies for the following period

Year ended 30 June 2012

Year ended 30 June 2013

The scheme commenced on

1 July 2011

Relevant facts and circumstances

You are currently employed in the financial sector.

You plan on taking voluntary redundancy in the 2011-12 financial year in order to complete your Bachelor of Business (Accounting).

You will be studying full-time. You expect to complete the degree in the 2012-13 financial year.

You are not eligible for any assistance from the government in the form of FEE-HELP or unemployment or student benefits.

You will not be employed whilst completing your studies.

You submit that a degree is a necessary in accounting in order to enhance your income earning abilities and to progress to a Chartered Accountant or Certified Practicing Accountant.

You will be seeking work in the financial sector once you have completed your studies.

In previous years your employer has assisted you with the cost of your studies.

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 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 are incurred in earning exempt income.

The deductibility of self education expenses falls for consideration under section 8-1.

Therefore, in considering whether you are entitled to a deduction for the costs incurred in your Bachelor of Business (Accounting), it is necessary to consider whether the expenses were incurred in the course of producing your assessable income.

Expenses incurred in obtaining employment

Expenses incurred by an employee in obtaining employment are not deductible because the expenses come at a point in time too soon to be regarded as being incurred in gaining assessable income. The expenditure is incurred in getting, not in doing, work as an employee.

The leading case on this issue is FC of T v. Maddalena 71 ATC 4161; (1971) 2 ATR 541 (Maddalenas Case). In that case, Barwick CJ stated (ATC at 4162; ATR at 548):

'The costs to an employee of obtaining his employment does not form an outgoing incurred in the course of earning the wages payable in the employment.'

This principle has been applied to deny taxpayers' expenditure that is a prerequisite to obtaining employment.

Self education expenses

Taxation Ruling TR 98/9 sets out the circumstances in which self education expenses are allowable as deductions, and states that self education expenses are deductible under section 8-1 of the ITAA 1997 where they have a relevant connection to the taxpayers current income earning activities.

TR 98/9 states that a deduction is allowable for self education expenses 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.

The leading case on the above principle is FC of T v. Finn (1961) 106 CLR 60; (1961) 12 ATD 348 (Finns Case). In that case, the High Court held that expenditure incurred by a senior government architect on an overseas tour devoted to the study of architecture was deductible. All three Judges recognised that the tour expenses were relevant to the activities by which the taxpayer was currently producing income.

Self education expenses are also allowable as a deduction if the study leads to, or is likely to lead to, an increase in a taxpayers' income from his or her current income earning activities in the future.

However, the ruling states that a deduction is not allowable if the self education is designed to enable a taxpayer to get employment, to obtain new employment, or to open up a new income earning activity (Maddalenas Case).

Your self education expenses

You have submitted that the Bachelor of Business (Accounting) course is relevant to your profession in the accountancy field and will lead to an increase in future income.

However, your circumstances differ materially from those in Finns Case, in that you do not have a position from which income is being derived during the period you are completing your degree. Therefore, there is not a sufficient nexus between the self education expenses incurred and the derivation of future income to permit the conclusion that they were incurred in gaining or producing future income.

From that point on, as you will not have a position, your study cannot lead to, or be likely to lead to, an increase in income from current income earning-activities. You will have no current employment.

The deductibility of self education expenses of a taxpayer who was not in employment at the time the expenses were incurred was considered in FC of T v. MI Roberts 92 ATC 4787; (1992) 24 ATR 479 (Roberts Case).

In Roberts Case, the taxpayer, a mine manager, was retrenched by his employer in Australia and then undertook a Master of Business Administration (MBA) degree in the United States for two years. On his return to Australia, he was re-employed as a mine manager by another company at a significantly higher salary than he previously earned. In disallowing a deduction for the expenses associated with the MBA course, the Federal Court applied the principle in Maddalenas Case. It was held that the expenses were incurred for the purpose of obtaining a new employment (albeit in a better position and at a higher salary), rather than in the course of earning the salary payable in the employment.

In your case, you will be unemployed when completing your degree. As in Roberts Case, because of the break in your employment, your self education expenses are incurred at a point too soon to be regarded as incurred in gaining or producing income from your future employment. Consequently, your self education expenses are not deductible under section 8-1 of the ITAA 1997.