Edited version of your private ruling

Authorisation Number: 1012476023777

Ruling

Subject: Technical trading education courses

Questions and Answers:

For the year ended 30 June 20XX, is your expenditure incurred on the course an allowable tax deduction?

No.

For the year ended 30 June 20XX, is your expenditure incurred on the course an allowable tax deduction?

Yes.

This ruling applies for the following periods:

Year ended 30 June 2012

Year ended 30 June 2013

The scheme commences on:

1 July 2011

Relevant facts and circumstances

You undertook a course of study prior to commencing your business.

Upon the completion of the courses, you commenced business.

Then around six months after commencing and continuing your business, you paid for and completed another course.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Reasons for decision

Self-education expenses

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 or necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income, except where the outgoings are of a capital, private or domestic nature.

In the High Court of Australia case of Federal Commissioner of Taxation v Maddalena (1971) 2 ATR 541; 71 ATC 4161, it was held expenses associated with the establishment of a business are not deductible; that such expenses come at a point too soon to be properly regarded as incurred in gaining assessable income; that the expenditure would not be an outgoing in carrying on a business.

Taxation Ruling TR 98/9 explains the Commissioner's view about the deductibility of self-education expenses incurred by an employee or a person in business. It states:

12. Self-education expenses are deductible under section 8-1 where they have a relevant connection to the taxpayer's current income-earning activities.

13. 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.

14. 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.

15. The fact that the study will 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) is not a sufficient basis in itself for self-education expenses to be deductible. This includes studies relating 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.

In addition, expenses incurred in improving knowledge and skills are not capital in nature. In both the High Court of Australia cases of Federal Commissioner of Taxation v. Finn (1961) 106 CLR 60; (1961) 12 ATD 348 and Federal Commissioner of Taxation v. Hatchett (1971) 125 CLR 494; 71 ATC 4184; (1971) 2 ATR 557, it is made clear expenses related to improving knowledge or skills are not of a capital nature. The court in those cases 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.

Carrying on a business

Taxation Ruling TR 2001/14 is about non-commercial business losses. Paragraph 69A provides, for a taxpayer start to carry on a business activity, broadly, this requires the taxpayer to have:

§ made a decision to commence the business activity;

§ acquired the minimum level of business assets to allow that business activity to be carried on; and

§ actually commenced business operations.

Taxation Ruling TR 97/11 is about carrying on a business of primary production. The principles therein are applicable to all cases about whether a taxpayer is carrying on a business.

Paragraph 39 of TR 97/11 states a mere intention to carry on a business is not enough (to amount to carrying on a business). There must be activity. It quotes Brennan J in Inglis v. Federal Commissioner of Taxation 80 ATC 4001 at 4004-4005; (1979) 10 ATR 493 at 496-497, who said:

The carrying on of a business is not a matter merely of intention. It is a matter of activity. ... At the end of the day, the extent of activity determines whether the business is being carried on. That is a question of fact and degree.

Paragraphs 45 and 46 of TR 97/11 provide the following theoretical example:

45. Lindsay and Loretta bought 700 hectares of run down rural land in 1980. They intended to start a cattle farming business. Over the next five years they spent several thousand dollars on farm machinery. They used this to clear the land, build roads and mend fences. They also bought and erected some farm buildings. No income was derived from the property until 1986 when they stocked the property with 100 cattle. Were Lindsay and Loretta carrying on a business from 1980 to 1985?

46. No, because:

§ the activities of Lindsay and Loretta from 1980 to 1985 would be regarded as preparatory to the commencement of business;

§ whilst they had a clear purpose to engage in cattle farming, they recognised that certain things needed to be done to the land before they were able to buy the cattle and put them on the land;

§ until 1986 there was no size or scale of the relevant activity in the sense that there was no stock; and

§ there was no repetition or regularity of activity with respect to cattle farming until the land was stocked.

Application of law in your case

In your case, for the year ended 30 June 20XX, you cannot claim a deduction for your expenditure incurred your expenditure incurred on the course because they opened up a open up a new income-earning activity, in which you were not yet engaged, and they were incurred at a point too soon to be regarded as incurred in gaining or producing assessable income of your (future) business.

However, for the year ended 30 June 20XX, since you had commenced and continued to carrying on a business during that financial year, your expenditure incurred on the course during that financial year is an allowable deduction under section 8-1 of the ITAA 1997 because it had a relevant connection to what were your current income-earning activities at that time.