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Ruling

Subject: Self-education expenses

Question:

Are you entitled to a deduction for costs associated with undertaking a professional association's course (the Course)?

Answer:

No.

This ruling applies for the following period

Year ended 30 June 2012

The scheme commenced on

1 July 2012

Relevant facts and circumstances

You have two income earning activities.

The first activity is as an employee.

The second activity is research services provided to professionals as a sole trader.

You did not conduct the second activity during the 2011-12 financial year but have decided to concentrate fully on the business activity.

You intend to expand your sole trader activity to include the provision of professional services.

You will undertake the Course.

You have incurred the following expenses in undertaking the Course:

· exam fee

· the Course fees

· books purchased for study.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1.

Reasons for decision

Summary

You are not entitled to a deduction for the cost of the course as its' completion will open up a new income earning activity, that of a professional. Additionally the costs are capital in nature as they provide you with an enduring benefit.

Detailed reasoning

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 deals with the deductibility of self-education expenses.

If a taxpayer's 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 self-education expenses are allowable as a deduction.

In FC of T v. Finn (1961) 106 CLR 60 at 70; (1961) 12 ATD 348 at 352, Windeyer J stated:

... a taxpayer who gains income by the exercise of his skill in some profession or calling and who incurs expenses in maintaining or increasing his learning, knowledge, experience and ability in that profession or calling necessarily incurs those expenses in carrying on his profession or calling...

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.

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, the self-education expenses are allowable as a deduction.

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 related 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.

Similarly a deduction is not allowable for fees paid to enable a taxpayer to be admitted to practise in a profession, as they are considered to be capital or of a capital nature (Taxation Ruling TR 95/9).

In Case J30 77 ATC 282; 21 CTBR (NS) Case 52, a law clerk claimed a deduction for admission fees paid by him to practise as a solicitor. After admission he continued in the same employment performing the same duties on increased salary. The claim was disallowed. Mr N Dempsey of the Board of Review applied the reasoning of Menzies J in the High Court decision of FC of T v. Maddalena 71 ATC 4161; 2 ATR 541 (Maddalena's case). It was considered that the expense was not incurred in doing work as a law clerk but in obtaining work as a solicitor, and therefore came at a point too soon to be regarded as incurred in gaining assessable income. 

In Case Z1 92 ATC 101; AAT Case 7541 (1992) 22 ATR 3549, the taxpayer was a public service clerk who had completed a course in legal studies but was not eligible for appointment as a solicitor unless she was admitted to practise. In order to do so she had to complete a six month course at the college of law. She claimed a deduction for expenses that led to her admission as a solicitor. The admission fees included advertising and travelling costs and the practising certificate fee. The Tribunal held the admission fees were of a capital nature and were, therefore, not an allowable deduction. The admission expenses secured the applicant a 'lasting advantage'.

They also secured her the status of a solicitor that was considered a 'profit yielding subject'. In applying Maddalena's Case, the Tribunal held that the admission expenses were also incurred in getting, not in doing, work as an employee. They came at a point too soon.

Similarly, in Case L38 79 ATC 208; 23 CTBR (NS) Case 44, an officer at a State Treasury Department claimed expenditure on admission fees incurred by him in gaining admission as a barrister and solicitor of a State Supreme Court. His admission as a legal practitioner was an essential qualification for the position of legal officer to which he was subsequently appointed. The claim was disallowed by the Tribunal on the grounds that upon admission the applicant had acquired an asset of enduring benefit that answered the description of a capital asset or asset of a capital nature.

In your situation, you provide research services to professionals as a sole trader activity. Undertaking the course will enable you to offer your services as a professional.

Whilst the course may improve your ability to research issues, completion of the Course will result in a new income earning activity - that of being a professional. You will be able to be engaged as a professional in your own right.

The completion of the course opens up a new income earning activity as you will be admitted to the professional association as a professional. Expenses associated with obtaining admission are considered capital in nature as they result in an enduring benefit, that being, admittance to the professional association which enables you to practice as a professional.

No deduction is allowable for the cost of undertaking the course as a new income earning activity is opened and the costs are capital in nature.