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Ruling
Subject: Repayment of loans
Question:
Can you claim a deduction for the repayment of loans used to fund your self-education expenses?
Answer:
No.
This ruling applies for the following periods:
Year ended 30 June 2010
Year ended 30 June 2011
Year ended 30 June 2012
The scheme commences on:
01 July 2009
Relevant facts and circumstances
You undertook study.
Whilst studying you obtained loans.
You used the loans to fund your self-education expenses that you could not afford at the time.
You were not receiving any financial assistance from the Government whilst undertaking your study.
You obtained the loans and undertook the study prior to commencing your current income earning activity.
The study undertaken directly relates to your current income earning activity.
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 relate to the earning of exempt income.
Taxation Ruling TR 98/9 sets out the circumstances in which self-education expenses are allowable as deductions, and states that these expenses are deductible under section 8-1 of the ITAA 1997 where they have a relevant connection to the taxpayer's current income earning activities.
This ruling also states that a deduction is allowable for interest incurred on borrowed monies where the funds are used to pay for self-education expenses associated with a course of education, which enables a taxpayer to maintain or improve his or her skill or knowledge or is likely to lead to an increase in income from the taxpayer's current income earning activities.
However, a deduction is not allowable for self-education expenses if the study is designed to enable a 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). The expenses come at a point in time too soon to be regarded as being incurred in gaining or producing assessable income.
Paragraphs 117 and 118 of TR 98/9 also provide the following example which is similar to your circumstances:
After completing his secondary education, Alex studied commerce as a full-time student at a private university. He borrowed $30,000 in 1995, repayable over 5 years, and used the funds to pay course tuition fees. He completed his degree the following year and obtained employment with an accounting firm in early 1997.
No deduction is allowable for interest incurred on the loan. The funds borrowed were not used for an income-producing purpose, but related to a course of study undertaken by Alex before he obtained his current employment. Accordingly, there is not a sufficient connection between the interest expense and Alex's current income-earning activities.
In your case, you obtained loans to assist with the funding of your self-education expenses whilst studying.
Although you still had these loans when you started your current income earning activity, the borrowed funds were not used for an income-producing purpose, but related to a course of study that you undertook before you obtained this employment. Accordingly, you are not entitled to a deduction for your loan outgoings under section 8-1 of the ITAA 1997.
In addition, repayments of the capital amount of a loan are outgoings of a capital nature and therefore are also not deductible for this reason.