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Ruling

Subject: Self education expenses

Question:

Are you entitled to a deduction for the payment made to your employer on termination of your employment?

Answer:

No

This ruling applies for the following periods

Year ended 30 June 2009
Year ended 30 June 2010
The scheme commences on

1 July 2008

Relevant facts and circumstances

You were an employee who undertook studies which were relevant to your employment at the time.

You incurred fees and your employer subsidised these fees.

You paid all of the fees through FEE-HELP.

You changed employment.

You made an agreement with your previous employer regarding your study arrangements that included:

· Your employer agreeing to pay a percentage of your self-education fees on successful completion of each part of the course.

· You agreeing to reimburse the employer a percentage of these fees should you resign within an agreed period after completion of the course.

· You resigned within the agreed period and reimbursed your previous employer for part of the subsidy that had been provided to you.

· You have claimed a deduction for your share of the expenses incurred.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1.

Reasons for decision

Self-education expenses generally fall for consideration under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997).  Section 8-1 allows a deduction for an outgoing to the extent that it is incurred in gaining or producing assessable income, except where the outgoing is of a capital, private or domestic nature.

The courts have considered the meaning of 'incurred in gaining or producing assessable income'. In Ronpibon Tin NL & Tong Kah Compound NL v. Federal Commissioner of Taxation (1949) 78 CLR 47; (1949) 4 AITR 236; (1949) 8 ATD 431 the High Court stated that:

· For expenditure to form an allowable deduction as an outgoing incurred in gaining or producing assessable income it must be incidental and relevant to that end. The words incurred in gaining or producing assessable income mean in the course of gaining or producing such income.  

· The expenditure must therefore be related to the production of assessable income for it to be an allowable deduction.

In cases where money has been repaid by a taxpayer to a former employer for breaching the employment contract, the Board of Review have held that such monies are not allowable deductions: Case J20 (1958) 9 TBRD 109, Case J60 (1958) 9 TBRD 308, Case P20 (1963) 14 TBRD 97 and Case G80 75 ATC 564. It was confirmed that the liability to make the payment arose from the breach of the agreement, and was not incidental to the gaining or producing of assessable income.

In Board of Review Case P20 (1963) 14 TBRD 97, a surveyor had entered into a bond with his employer prior to receiving his professional qualification. The bond provided that he reimburse his employer the employer's cost of his training should he resign his employment within five years of receiving his qualification. The taxpayer resigned four months after receiving his qualification and was required to repay an amount of $350. The Commissioner disallowed a deduction for this amount and the taxpayer appealed to the Board of Review. In finding for the Commissioner the Board of Review stated:

The expenditure in question flowed directly from the taxpayer's breach of covenant. It was a consequence of the taxpayer's termination of his employment with the department in order to take up duties with a new employer, and even though an increased salary flowed from this move, in no sense can it be said that the outgoing in question was incurred in the course of gaining or producing assessable income from the new source. It was not truly incidental or relevant to the actual derivation of salary income. Likewise, although the expenditure had to be borne for the taxpayer to put himself in the position to earn fees as a private practitioner, it was not necessarily incurred in the course of carrying on a business for the purpose of earning those fees. The liability for the outgoing was independent of any activity of the taxpayer in the gaining of any income by him.

The principles outlined in the above cases may be applied to your particular situation.

In your case, you agreed to reimburse your previous employer as a result of terminating your employment with them. The payment would not have been requested had you continued your employment beyond the agreed period after you had completed your studies. The payment represents an amount incurred as a result of you terminating your employment; therefore it cannot be said to have been incurred as a self-education expense.

As this amount was not incurred in the course of earning your assessable income, you are not entitled to claim a deduction for it.