Edited version of your private ruling

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Ruling

Subject: self education expenses

Question

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

Answer

No.

This ruling applies for the following periods

Year ended 30 June 2006

Year ended 30 June 2007

Year ended 30 June 2008

Year ended 30 June 2009

Year ended 30 June 2010

Year ended 30 June 2011

The scheme commenced on

1 July 2005

Relevant facts

The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are:

o the application for private ruling

o the email with position description and subjects studied.

You are a professional, currently acting as a manager.

The position description for the role states that the formal education requirements are tertiary professional and post graduate qualifications in a business field is preferable.

The elements of your work involve some form of legal relationship.

In your current acting manager role, you are responsible for ensuring any contracted position is effected and any risks associated with delivering the project are mitigated. You encounter legislative interpretation, contract law, industrial relations, public liability and international law in any given project.

You advise that to progress to a manager, legal studies are required to enable sound commercial and corporate decisions to be effected.

You have undertaken a Law degree and commenced your studies in 20XX. Not all subjects studied are directly relevant, however, it is difficult to access the relevant subjects without undertaking the overall course.

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.

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)

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).

Self education expenses are generally deductible under section 8-1 of the ITAA 1997 where they have the necessary connection to your current income earning activities.

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.

No deduction is allowable for self education expenses if the study is designed to enable the 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. If the studies relate to a particular profession, occupation or field of employment in which you are not yet engaged, the expenses are incurred at a point too soon to be regarded as incurred in gaining or producing assessable income (FC of T v. Maddalena 71 ATC 4161; (1971) 2 ATR 541) (Maddalena's case).

Where a course is too general in relation to your current employment duties, the necessary connection between the expense and your income earning activity does not exist and no deduction is allowed.

Consequently, it is necessary to determine the connection between the particular outgoing and the operations by which the taxpayer more directly gains or produces their assessable income (Charles Moore & Co Pty Ltd v. Federal Commissioner of Taxation (1956) 95 CLR 344; (1956) 11 ATD 147; (1956) 6 AITR 379 and Federal Commissioner of Taxation v. Hatchett (1971) 125 CLR 494; 71 ATC 4184; (1971) 2 ATR 5570. Whether such a connection exists is a question of fact to be determined by reference to all the facts of the particular case.

To determine whether circumstances exist which would support your deduction for the Law degree, 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 Case R60, 84 ATC 447 the Board of Review disallowed self-education expenses. The taxpayer was a public servant and the position required relevant experience or some legal training (which the taxpayer already had) but not legal qualifications as such. In the circumstances, the continuation of the taxpayer's legal studies could not be characterised as a relevant incident of or as part and parcel of his employment.  While the legal studies were specified as an advantage for the position held and the taxpayer's legal training was relied on by the branch he was in, if the studies were discontinued, the branch would not have reacted at all. The branch head saw the encouragement given to the taxpayer as part and parcel of normal staff development.

Case V132 88 ATC 842 concerning a librarian studying computing again confirms that it is not sufficient for a taxpayer to claim their studies will enable them to perform their duties more efficiently and enhance promotional prospects, where it is felt that the studies are not essential to their present duties and effectively open up a new field of employment.

In Lloyd v. Commissioner of Taxation 2006 ATC 2057, the Senior Member denied a deduction for self education expenses for a PhD student. The taxpayer had obtained a bachelor qualification and had progressed on to a PhD in the same field. They had obtained employment in their field of study during the completion of the PhD and on completion of the PhD had obtained a much higher paying job. The Senior Member found that the PhD course was the primary object of the taxpayer and that the employment was to support their study. The object of the PhD was to expand their knowledge in their chosen field to ultimately obtain more highly paid positions.

In Case Z1 22 ATR 3549; 92 ATC 101 (Case Z1), a public service clerk studying for a law degree later obtained a legal officer position in the public service. The qualifications as a solicitor were not necessary for her current employment. The expenses were held to have been incurred in getting work as a legal officer not in doing work as an employee and therefore not deductible. At all times the taxpayer was employed in a position where such qualifications were not necessary although the gaining of such qualifications were encouraged. The course was pursued by the taxpayer of her own choice and for her own self improvement.

Your situation is comparable to the above cases. You currently have significant skills and experience as a professional. You are currently acting as a manager and hope to obtain this position. You advise that the legal studies are necessary for any manager to ensure sound commercial and corporate decisions are made.

While you advise that some of the subjects studies provide knowledge and skill that are used in your role as manager, this role does not require qualifications in law. The Law degree will provide you with qualifications that are far in excess of the requirements of your current professional position and cannot be said to be sufficiently related to your current employment duties.

It is considered that your situation is similar to that of Case Z1. In your case, there is no implicit or explicit condition to pursue a law degree. Such qualifications are not essential although may improve your performance in your current employment.

It is accepted that your legal studies may have been of some benefit to you in your current work. However, that benefit is only incidental as your studies are providing you with knowledge and skill in a field you are not currently employed. Your legal studies are designed more for your future employment opportunities rather than to enhance your current income earning capabilities.

It is considered that the decision in Maddalena's case applies to your situation. Your studies will assist you to get a future job as a manager and have been incurred at a point too soon. As highlighted above, where a course is undertaken to open up another source of income earning potential from the qualification, a deduction is not generally allowable. Law is regarded as a different income earning activity than that of a professional. Your studies will give you new qualifications and enable you to obtain employment in a different field. The studies are regarded as not being sufficiently relevant to your present income-earning activities.

Consequently, the self-education expenses incurred in undertaking the Law degree do not have the necessary and relevant connection with the earning of your assessable income and are preparing you for future employment. You are therefore not entitled to a deduction for self-education expenses under section 8-1 of the ITAA 1997.