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Ruling

Subject: self education expenses

Question 1

Are you entitled to claim a tax deduction in respect of your self education expenses?

Answer

No.

Question 2

Are the losses of your sole trader entity transferrable to a corporate entity?

Answer

No.

This ruling applies for the following periods;

Year ended 30 June 2011
Year ended 30 June 2012
Year ended 30 June 2013

The scheme commenced on

10 June 2011

Relevant facts and circumstances

You are a sole trader providing advice on several subjects. You have been investigating other areas where your advice may be helpful. You attended self education courses to learn how to best advise in these other areas.

You were told that you should change your business structure from a sole trader to a corporate entity to better protect your assets. You have taken this advice and set up a company and changed your business name. The nature of your business has not changed only the name.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1
Income Tax Assessment Act 1997 Division 36

Income Tax Assessment Act 1997 section 36-17

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 or are necessarily incurred in carrying on a business for the purpose of 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, or a provision of the ITAA 1997 prevents it.

Taxation Ruling TR 98/9 discusses the circumstances under which self-education expenses are allowable as a deduction. A deduction is allowable 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.

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. 

The decision of the High Court in FC of T v Maddalena 71 ATC 4161 establishes the principle that no deduction is allowable for self-education expenses if the study is designed to enable a taxpayer to get employment or to obtain new employment. Such expenses are incurred at a point too soon to be regarded as incurred in gaining or producing assessable income.

TR 98/9 provides the following examples:

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.

In Case Z1 92 ATC 101; AAT Case 7541 (1991) 22 ATR 3549 (Case Z1), 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 have recently undertaken several courses to increase your skills and knowledge. At some point in the future you intend to advise your clients regarding the knowledge gained from these courses.

It is accepted that the knowledge gained during, and at the completion of the courses may be of benefit to you as an advisor. The knowledge gained may enable you to advise your clients on suitable strategies at a later date however the expenses are incurred at a point too soon to be regarded as incurred in the course of earning assessable income. Your case is similar to the examples described above.

Your claim is disallowed as it is considered that the expense was not incurred whilst doing work but in obtaining work, notwithstanding that it was within your business. The expenses are incurred at a point too soon to be regarded as incurred in gaining or producing assessable income.

The expenses in relation to the various conference courses and travel expenses are not an allowable deduction under section 8-1 of the ITAA 1997.

Division 36 of the ITAA 1997 explains how to calculate a tax loss for an income year. Section 36-17 of the ITAA 1997 refers to 'the entity's total assessable income' and 'the entity's total deductions'. Accordingly, there is a requirement for the taxpayer that seeks a deduction for a tax loss of an earlier income year, to be the same taxpayer that originally incurred the tax loss.

ATO Interpretative Decision ATO ID 2004/811 specifies how a corporate tax entity, an incorporated association, should deduct a loss in a later income year. It sates that as the incorporated association is not the same legal entity as the unincorporated association (which incurred the tax loss), it is not entitled to a deduction for this tax loss under section 36-17 of the ITAA 1997.

In your case your losses as a sole trader cannot be transferred to a corporate entity as they are not the same legal entity.