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Ruling

Subject: Work-related self education expenses

Question 1

Are you entitled to claim a deduction for work-related self education expenses in the relevant financial year?

Answer

No

This ruling applies for the following periods:

Year ended 30 June 2012

The scheme commences on:

1 July 2011

Relevant facts and circumstances

During the relevant financial year you were provided an opportunity to study a course of education which was funded by your employer.

If your employment ceased for any reason besides redundancy within 12 months of commencing the course of education you would be required to repay all of the course fees to your employer. If your employment ceased for any reason besides redundancy within 12-24 months of commencing the course of education you would be required to repay X% of the course fees.

During the income year you received notice that you employment was to be terminated. In response you launched an unfair dismissal action against your employer. You obtained alternative employment and resigned from your position.

You received a demand from your employer for repayment of the course fees. Your employer retained your termination payments and applied them to the amount outstanding.

You informed your employer that you would cease your unfair dismissal action if your employer waived the outstanding course fees and paid you your termination entitlements. An agreement was made to this effect and you received payment in lieu of notice and for unused annual leave. You were not required to repay the course fees.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Reasons for decision

Work related expenses generally fall for consideration under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997). This section allows a deduction for losses and outgoings which are incurred in the course of gaining or producing assessable income, unless the losses or outgoings are capital, or are of a capital, private or domestic nature. 

A deduction is allowable if an expense;

(a) is actually incurred;

(b) meets the deductibility tests; and

(c) satisfies the substantiation rules.

Taxation Ruling TR 97/7 sets out the Commissioner's views on the meaning of incurred under section 51(1) of the Income Tax Assessment Act 1936 (replaced by section 8-1 of the ITAA 1997).

You must incur an expense in the course of gaining or producing your assessable income to claim a deduction under section 8-1 of the ITAA 1997.

There is no statutory meaning of 'incurred'.

Generally, you incur an expense at the time you owe a present money debt that you cannot escape.

The courts have developed the following set of rules that help to determine if an expense has been incurred.

· there must be a presently existing liability to pay a pecuniary sum;

· the liability may be defeasible by others;

· the liability must be a sum certain or capable of reasonable estimation;

· presently existing liability is determined on the circumstances of the case; and

· an expense is incurred when actually paid if there was no presently existing liability.

In your case, you have not incurred an expense. Your employer paid your course fees, and you would only have been expected to reimburse them if your employment ceased. Although your employment did cease, the subsequent agreement made with your employer ensured that no repayment of the course fees was required.

As your employer does not require repayment of the study debt, you have not incurred any expense. As you have not incurred an expense, you are not entitled to claim a deduction.

As you have not incurred an expense, the question of whether the course of education was relevant to your employment will not be considered.

Furthermore, even if you had repaid the course fees to your employer, you still would not have been entitled to a 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, the agreement with your employer stated that you would be required to reimburse your previous employer for the course fees as a result of your terminating your employment with them. The payment would not have been requested had you continued your employment beyond the 24 months after you had commenced the course of education. 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.