Edited version of your private ruling

Authorisation Number: 1012442454228

Ruling

Subject: Deduction under section 40-880 of the ITAA 1997

Question

Is the cost of the course deductible?

Answer

No

This ruling applies for the following period

Year ending 30 June 2012

The scheme commenced on

1 July 2011

Relevant facts

You were an employee.

You attended and completed a course and paid an amount (including GST) to attend the course.

The purpose of the course was to enable you to start a new line of work as a business.

After completing the course you now operate your own business.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 40-880

Reasons for decision

Summary

You are not entitled to a deduction for the cost of the course under section 40-880 of the ITAA 1997 as it is not capital expenditure.

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 discusses circumstances in which self education expenses are allowable as a deduction under section 8-1 of the ITAA 1997. If a taxpayer's current income earning activities are based on the exercise of a skill or some specific knowledge and the self education enables the taxpayer to maintain or improve that skill or knowledge, the self education expenses are allowable as a deduction.

The decision in FC of T v. Maddalena 71 ATC 4161; 2 ATR 541 also supports the Commissioner's view that no deduction is allowable if the study is designed to enable a taxpayer to open up a new income earning activity, whether in business or in the taxpayer's current employment. This would include studies relating to a particular profession, occupation or field of employment in which the taxpayer is not yet engaged.

TR 98/9 provides two examples that are relevant to your situation:

Joseph is currently employed as a clerk in a public service department. He would like to transfer to a position in another section of the department and undertakes a course of study designed to equip him with the skills needed in that position. The study is unrelated to the skills required in his current position and is not likely to lead to an increase in income. As the study is designed to enable Joseph to enter a new income-earning activity, no deduction is allowable.

Desiree is a general medical practitioner in partnership with two other general practitioners in a large regional town. She undertakes further study in dermatology in order to set herself up independently as a specialist dermatologist. The expenses related to the study are not allowable as the study is designed to open up a new income-earning activity as a specialist.

In your case you previously worked in the industry and undertook the course to enable you to operate your own business once you passed the course (and other criteria). As a new income earning activity will be opened up when you start your business, the cost of the course was incurred at a point too soon for it to be deductible under section 8-1 of the ITAA 1997.

The nature of expenses relating to improving knowledge or skills

The question on whether expenses relating to improving knowledge or skills are of a revenue or capital nature must be addressed.

Two leading cases in relation to self education expenses are FC of T v. Finn (1961) 106 CLR; (1961) 12 ATD 348 (Finn's case) and FC of T v. Hatchett (1971) 125 CLR 494; 71 ATC 4184; (1971) 2 ATR 557 (Hatchett's case).

In Finn's case, the High Court held that expenditure incurred by a senior government architect on an overseas tour devoted to the study of architecture was allowable under section 8-1. All three Judges recognised that the tour expenses were relevant to the activities by which Mr Finn was currently producing income. Kitto J found (106 CLR at 69; 12 ATD at 352) that the tour was incidental to the proper execution of the duties of Mr Finn's office because:

'Its professional status implied an obligation of progressive acquaintance with a living and developing art. It was therefore, I think, plainly incidental to the office that the respondent should avail himself of such opportunities as might arise to add ... to his knowledge and understanding of architectural achievements and trends overseas ...'.

Windeyer J (106 CLR at 70; 12 ATD at 352) was of a similar view to Kitto J, stating that:

'... 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.'

In Hatchett's case, Menzies J. held that expenses incurred by a primary school teacher in relation to the submission of theses to gain a Teacher's Higher Certificate were allowable. His Honour considered that the certificate expenses were related to the actual gaining of income because possession of the certificate entitled Mr Hatchett to move to another pay scale and, therefore, to earn more money in the future. It also entitled him to be paid more for doing the same work without any change in grade (125 CLR at 498; 71 ATC at 4186; 2 ATR at 559).

Both Finn's and Hatchett's cases make it clear that expenses related to improving knowledge or skills are not of a capital nature. They rejected the argument that such improvement amounts to the acquisition of something of an enduring nature, equivalent to the extension of plant in a factory.

After considering the principle established, as a result of both Finn's and Hatchett's cases, expenses incurred to complete the course to increase your knowledge in the industry are not of a capital nature.

Business Related Costs

The object of Section 40-880 of the ITAA 1997 is to make certain business capital expenditure deductible over 5 years if:

the expenditure is not otherwise taken into account, and

a deduction is not denied by some other provision; and

the business is, was or is proposed to be carried on for a taxable purpose.

As previously outlined, it is considered that the expense incurred for the course is not capital in nature and consequently section 40-880 of the ITAA does not apply, therefore you are not entitled to a deduction under that section.