Edited version of your private ruling

Authorisation Number: 1012507949028

Ruling

Subject: professional development

Question

Are you entitled to a deduction for expenses incurred for the course?

Answer

No.

This ruling applies for the following period

Year ended 30 June 2012

The scheme commenced on

1 July 2011

Relevant facts

You graduated with your degree in 2010.

For part of the 2011-12 income year you ran a business. During the 2011-12 income year you commenced full-time employment and worked in the same profession.

You completed a course.

As a professional, you are required to attend professional development and continuing education courses to upgrade your skills and knowledge.

Your employer encouraged you to continue your course and advised that the course provided you with useful knowledge about the office environment and work place culture as well as improve your communication skills with clients and colleagues. All these skills were important in your employment position.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1.

Reasons for decision

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 are 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, or relate to the earning of exempt income.

The deductibility of professional development as well as self education expenses fall for consideration under section 8-1 of the ITAA 1997.

A number of significant court decisions have determined that, for an expense to satisfy the tests outlined in section 8-1 of the ITAA 1997:

§ it must have the essential character of an outgoing incurred in gaining assessable income or, in other words of an income-producing expense (Lunney v FC of T (1958) 100 CLR 478);

§ there must be a nexus between the outgoing and the assessable income so that the outgoing is incidental and relevant to the gaining of assessable income (Ronpibon Tin NL v FC of T (1949) 78 CLR 47)

§ it is necessary to determine the connection between the particular outgoing and the operations or activities by which the taxpayer most directly gains or produces his or her assessable income (Charles Moore & Co (WA) Pty Ltd v FC of T (1956) 95 CLR 344; FC of T v Hatchett 71 ATC 4184 (Hatchett's case).

Taxation Ruling TR 98/9 discusses the circumstances under which self education expenses are allowable as a deduction. The principles outlined in this ruling apply equally to professional development courses and are therefore relevant in your case.

A deduction is allowable for self education expenses if a taxpayer's current income earning activities are based on the exercise of a skill or some specific knowledge and the subject of the self education enables the taxpayer to maintain or improve that skill or knowledge (Federal Commissioner of Taxation v. Finn (1961) 106 CLR 60, (1961) 12 ATD 348).

Similarly, 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, a deduction is allowable.

However, TR 98/9 states that no deduction is allowable for self education expenses if the study is to enable a taxpayer to get employment, to obtain new employment or to open up a new income earning activity.

Paragraph 42 or TR 98/9 states:

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. The cost of self-improvement or personal development courses is generally not allowable, although a deduction may be allowed in certain circumstances.

To determine whether circumstances exist which would support the deduction for your professional development course we must look to the 'essential character' of the expenditure. It is necessary to determine whether there is a sufficient nexus between the expenditure and your income earning activities.

In Case U101 87 ATC 616 (Case U101) and Naglost v. FC of T (2001) 2002 ATC 2008; (2001) 49 ATR 1028 (Naglost), the Administrative Appeals Tribunal (AAT) considered the deductibility of expenditure on personal development courses.

Case U101 concerned a taxpayer who was employed as a Taxation Office inspector. He undertook a course on communication, clear self-expression and work organisation. The taxpayer considered the course would assist him to carry out his work more efficiently. The AAT denied the claim and held that there was not a sufficient nexus between the expenditure in pursuing the course and the taxpayer's employment. It could not be said that the studies were part and parcel of the employment, or that they were incurred in the process of carrying out duties as an employee. Nor could it be seen that they would have a direct effect on the taxpayer's income.

Conversely, in Naglost the AAT allowed a partial deduction to a serving member of the Royal Australian Air Force (RAAF) who undertook a course of study at 'Mastery University'. The taxpayer's duties included management responsibilities and the course of study was designed to enhance leadership, management capabilities and decision-making processes. Further, the course was approved by the taxpayer's employer and some expenses were reimbursed by the RAAF. Testimony from the taxpayer's superior officer stated that the course would enhance the taxpayer's ability to perform at a high level.

The AAT held that the majority of the courses were relevant to the taxpayer's occupation, but that the course 'Wealth Mastery' was of a purely personal nature and thus not deductible. The AAT held that the majority of the expenditure was allowable as it was considered to be directly relevant to the applicant's role as a manager. The applicant had direct management responsibility for a group of 20 to 25 people and was responsible for the unit's physical training, plus occupational health and safety. Therefore, expenditure on the course was considered to be sufficiently relevant to the taxpayer's income producing activities.

In Hatchett's case, a primary school teacher was not allowed deductions for university fees incurred on an Arts degree course. The university fees had no connection with the activities by which Mr Hatchett gained his income as a primary school teacher. It was not enough that Mr Hatchett's employer encouraged the taxpayer to undertake the course, nor that the course was likely to make Mr Hatchett a better teacher in a general sense.

In Case M10, the taxpayer was an agent for a life assurance society. He was denied a deduction for the cost of a Dale Carnegie Course in which he received instruction and training on Effective Speaking, Leadership Training and Human Relations. The prospectus of the course states that the course consists of a combination of public speaking, salesmanship, human relations, personal development and applied psychology. In disallowing the deduction claimed, the member of the Tribunal commented that expenditure by a taxpayer upon development of his personality, self-confidence and self-expression can only be expenditure of a private nature whatever the ulterior purposes may otherwise be served. The course was in the nature of an advanced educational training for people in all walks of life and was private in nature and not allowable as a deduction under section 8-1 of the ITAA 1997. It was held that there was insufficient connection with his occupation.

In Case V13, the taxpayer was a life assurance sales woman. In an attempt to improve her selling skills the taxpayer undertook, at considerable expense, a series of courses in communication, personal development and business skills offered by the Church of Scientology. She claimed that the purpose of her study was to improve her selling skills. The taxpayer's claims for the cost of the course and for depreciation of books were disallowed by the Commissioner and her appeal to the objection was further disallowed by the AAT. In disallowing the claim P M Roach (Senior Member) indicated that he accepted that her studies contributed to her personal development in ways that gave her a greater self-confidence and a greater art of communication and there-by gave her a greater capacity to persuade others to follow courses proposed by her. He stated that despite these contentions, the courses undertaken were principally directed to the personal development of the individual and of her capacities. The courses under consideration were conducted at that level and were so closely and deeply involved with the individual person that they must be characterised as private.

In Case H40 76 ATC 337, the taxpayer was employed by the Australian Government. He incurred fees for a Dale Carnegie course in Effective Speaking and Human Relations. The subjects covered fell into three broad groups, namely, instruction in speaking, instruction in methods of developing self-confidence and memory training. It was held that the qualifications offered by the course in effective speaking and human relations were too general. The instructions given in public speaking, in methods of developing self-confidence and in memory training were directed towards the enrichment of the taxpayer as a person rather than in enhancing his qualities as an employee.

Although the above cases are not identical to your circumstances, the principles have relevance.

The course covers areas that does not focus on your professional skills and may be relevant to many professions.

Even though a course may make a person a better employee and better able to carry out their duties, this is not sufficient to enable the expenditure to be allowed as a deduction.

By applying the principles as established in the above cases to your case, it is considered that the expenses of the course are not themselves directly attributable to the derivation of your assessable income as an accountant.

The course may broaden your knowledge and professional skills. However, as with the cases quoted above, the courts have held that these reasons alone are not enough to demonstrate a sufficient connection between the expenses and your income producing activities. There are many courses and experiences which may help an accountant however this does not automatically mean that the associated expenses are deductible.

It is acknowledged that you acquired some new and practical skills, however it is not considered that the course is directly related to your current income earning activities as in Naglost. That is, the nexus between your outgoings and deriving your assessable income is too remote. 

Although improving your communication and interpersonal skills and learning about the business environment impact on your working life, it is not a cost that is sufficiently connected to your assessable income as a professional. Case V13 provides strong support for this view.

While the course may be accepted as being part of your professional development and may be of assistance to you as an accountant, the expenses incurred in acquiring this knowledge and experience are not expenses incurred in gaining your assessable income. Furthermore, the fact that your employer encouraged you to continue the course is not a decisive factor.

The course does not have the 'essential character' of an income-producing expense. The link to your current duties or former business activities is too remote. Accordingly, the expenses are not deductible under subsection 8-1 of the ITAA 1997.