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Ruling

Subject: Self-education expenses

Question 1

Are you entitled to a deduction for your self-education expenses?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 2014

The scheme commenced on:

1 July 2013

Relevant facts and circumstances

You have a Law Degree and you commenced employment with a Commonwealth government department as part of the Graduate Program during the year ended 30 June 2013.

After undergoing induction you started your training rotations within various branches of the department.

Your final training rotation was based in a branch of the department that required you to research, comment, provide advice and process casework based on each case's level of risk of litigation.

After you started your rotation in this branch you commenced a course of study at a local college.

Successful completion of this course of study will enable you to be admitted as a Solicitor.

You will commence a permanent placement in a different branch of the department where your duties will be to research and interpret legislation and monitor litigation risks.

You are not receiving any allowances or reimbursements for your expenses. You are not receiving a scholarship.

You anticipate this will assist you in advancing your employment opportunities.

You will complete the course during the current calendar year.

As part of the Graduate Program you are not entitled to apply for study leave.

You do intend to apply for study leave once you commence your permanent placement to assist with studying and attending exams.

The Graduate Program rotation manager and other colleagues in the department have all encouraged you to do this course.

As the course was being offered locally you started earlier than first expected to avoid having to pay for flights to attend in Brisbane.

You are undertaking all the compulsory subjects and your first elective is Administrative Law Practice. Your second elective is yet to be confirmed; it depends on which subjects they are offering in Townsville.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Reasons for decision

Summary

You are not entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for the cost of your self-education expenses as they are capital in nature.

Deductions - general principles

The general deduction provision contain in section 8-1 of allows a deduction for a loss or outgoing to the extent it is:

· incurred in gaining or producing your assessable income (the first limb); or

· necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income (the second limb).

However, even if the first or second limb is satisfied, a deduction is not permitted under section 8-1 to the extent the loss or outgoing is:

· capital, or of a capital nature;

· private or domestic in nature;

· incurred in gaining or producing exempt income or non-assessable non-exempt (NANE) income; or

· otherwise prevented from being deducted by a specific provision with taxation legislation.

Self-education expenses

The Commissioner's view on the deductibility of self-education expenses is contained in Taxation Ruling TR 98/9 Income tax: deductibility of self-education expenses incurred by an employee or a person in business.

This ruling explains that such expenses are deductible under section 8-1 where they have a relevant connection to the income-earning activities being undertaken at the time of the study.

Paragraph 13 of TR 98/9 explains that if your income-earning activities are based on the exercise of a skill or some specific knowledge and the subject of self-education enables you to maintain or improve that skill or knowledge, the self-education expenses will be allowable as a deduction.

In addition, Taxation Ruling 95/9 Income tax: employee lawyers - allowances, reimbursements and work-related deductions points out, beginning at paragraph 33, that admission fees are not allowable deductions as they are considered to be capital in nature.

Paragraphs 34 and 35 specifically discuss cases involving employees who completed courses that led the applicants to admission as solicitors. In both examples their deductions were disallowed.

The decision of the High Court in FC of T v Maddalena 71 ATC 4161; (1971) 2 ATR 541 establishes the principle that no deduction is allowable for self-education expenses if the study is designed to enable a taxpayer to get employment or obtain new employment.  Such expenses are incurred at a point too soon to be regarded as incurred in gaining or producing assessable income.

It is also important to consider whether the expenses are incurred in the taxpayer's current income-earning activity or in opening up a new activity even if the employer remains the same throughout. 

In Case Z1 92 ATC 101; AAT Case 7541 (1992) 22 ATR 3549, the applicant, a legal officer with the public service was denied a deduction for the costs of a six-month pre-admission course as a solicitor at the College of Law. The Tribunal held the admission fees were of a capital nature and were, therefore, not an allowable deduction under section 8-1 of the ITAA 1997. The expenses secured for the taxpayer a 'lasting advantage' or 'enduring benefit'. The expenses were incurred in getting, not in doing, work as an employee. They came at a point too soon to be regarded as expenses incurred in gaining assessable income. They also secured her the status of a solicitor that was considered a 'profit yielding subject'

In Case J30 77 ATC 282; 21CTBR (NS) Case 52, a law clerk claimed a deduction for admission fees to practise as a solicitor.  After admission he continued in the same employment performing the same duties on increased salary.  The claim was disallowed.  It was considered that the expense was not incurred in doing work as a law clerk but in obtaining work as a solicitor and this would be so notwithstanding that it was with the same employer. FC of T v. Hatchett (1971) 125 CLR 494 45 ALJR 565 71 ATC 4184 was distinguished on the basis that admission amounted to a change in the applicant's status. Taxation Board of Review Member Dr Gerber noted the change in status…"transmuted from the dross of clerkship to the gold of an Officer of the Court".

In Case L38 79 ATC 208; 23 CTBR (NS) Case 44 , an officer at a State Treasury Department claimed expenditure on admission fees incurred by him in gaining admission as a barrister and solicitor of a State Supreme Court. His admission as a legal practitioner was an essential qualification for the position of legal officer to which he was subsequently appointed. The claim was disallowed by the Tribunal on the grounds that upon admission the applicant had acquired an asset of enduring benefit that answered the description of a capital asset or asset of a capital nature.

Enduring benefit

An enduring benefit, as discussed in AAT case 7541, suggests that if a loss or outgoing gives rise to a benefit of an enduring nature, the loss or outgoing is more likely to be capital in nature. In British Insulated & Helsby Cables Ltd v Atherton (1926) AC 205; p 10 TC 15, Viscount Cave LC made his classic statement as to the characteristics of capital expenditure when he said (at p 192):

When an expenditure is made, not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, I think that there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital.

Applying this case history to your situation
While you were completing your rotations as a graduate with a Commonwealth government department, you commenced a Practical Legal Training Program. This is a specialised program that leads to the award of a Graduate Diploma of Legal Practice allowing you to apply for admission to practise as a solicitor.

The Graduate Diploma in Legal Services is considered to be part of gaining your qualification as a solicitor.  The skills you are acquiring are not to enable you to undertake your current duties; it is not a requirement that you be admitted as a solicitor to complete your duties. Rather, they are a prerequisite to allowing you to practice as a solicitor.  As such, the expense is considered to be incurred at a point too soon to be regarded as incurred in gaining your current assessable income.

Conclusion

The expenditure incurred in relation to the Practical Legal Training Program is capital in nature as it will provide an enduring benefit, that being admittance as a solicitor.

Therefore a deduction is not allowable under section 8-1 of the ITAA 1997.

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