Edited version of your written advice

Authorisation Number: 1012671533843

Ruling

Subject: Self-education expenses

Question

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

Answer

No.

This ruling applies for the following periods

Year ended 30 June 2013

Year ended 30 June 2014

The scheme commenced on

1 July 2012

Relevant facts

The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are:

• the application for private ruling

• the additional information received including position descriptions and course and modules guide.

You are employed by entity A.

You receive an allowance of less than $15,000 per annum for this role. You work two days per week in this role.

The position description for entity A states that other work related expenses are to be reimbursed if approved by the board of directors. However, as your expenses relate to only one of the two directors, it was not considered to be a company expense.

You also hold a secondary role with entity B. You carry out this role one day per week and do not receive any income for this role.

You undertook studies.

You incurred over $100,000 in tuition fees and in non-tuition expenses to cover onsite accommodation and meals. You also incurred travel expenses for the overseas study tour component of the course.

You advise that the studies have assisted in both of the above roles equally.

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, except where the outgoings are of a capital, private or domestic nature.

A number of significant court decisions have determined that for an expense to be an allowable deduction:

n 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),

n 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), and

n 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).

Self-education expenses are generally deductible under section 8-1 of the ITAA 1997 where they have the necessary connection to your current income earning activities.

Taxation Ruling TR 98/9 discusses the circumstances under which self-education expenses are allowable as a deduction. 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.

No deduction is allowable for self-education expenses if the study is designed to enable the 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. If the studies relate to a particular profession, occupation or field of employment in which you are not yet engaged, the expenses are incurred at a point too soon to be regarded as incurred in gaining or producing assessable income (FC of T v. Maddalena 71 ATC 4161; (1971) 2 ATR 541) (Maddalena's case).

Where a course is too general in relation to your current employment duties, the necessary connection between the expense and your income earning activity does not exist and no deduction is allowed.

Consequently, it is necessary to determine the connection between the particular outgoing and the operations by which the taxpayer more directly gains or produces their assessable income (Charles Moore & Co Pty Ltd v. Federal Commissioner of Taxation (1956) 95 CLR 344; (1956) 11 ATD 147; (1956) 6 AITR 379 and Federal Commissioner of Taxation v. Hatchett (1971) 125 CLR 494; 71 ATC 4184; (1971) 2 ATR 5570. Whether such a connection exists is a question of fact to be determined by reference to all the facts of the particular case.

To determine whether circumstances exist which would support your deduction for the MBA studies, the essential character of the expenditure must be considered. It is necessary to determine whether there is a sufficient nexus between the expenditure and your current income-earning activities.

In Case R60, 84 ATC 447 the Board of Review disallowed self-education expenses. The taxpayer was a public servant and the position required relevant experience or some legal training (which the taxpayer already had) but not legal qualifications as such. In the circumstances, the continuation of the taxpayer's legal studies could not be characterised as a relevant incident of or as part and parcel of his employment.  While the legal studies were specified as an advantage for the position held and the taxpayer's legal training was relied on by the branch he was in, if the studies were discontinued, the branch would not have reacted at all. The branch head saw the encouragement given to the taxpayer as part and parcel of normal staff development.

Case V132 88 ATC 842 concerning a librarian studying computing again confirms that it is not sufficient for a taxpayer to claim their studies will enable them to perform their duties more efficiently and enhance promotional prospects, where it is felt that the studies are not essential to their present duties and effectively open up a new field of employment.

In Gupta v. FC of T 2002 ATC 2319; 2002 51 ATR 1205 (Gupta's Case) the taxpayer was undertaking a Bachelor in Computer Science while he was employed on a casual basis as a demonstrator in the University's School of Computing and IT. The taxpayer claimed deductions for his self-education expenses on the basis that there was a direct connection between the expenses incurred and his maintaining or improving his skills necessary for the work at the university. The Commissioner of Taxation denied the claims on the basis that the expenses were incurred to enable him to gain his degree, and were not incurred in the process of earning his assessable income as a part-time employee. The taxpayer sought a review of this decision by the Administrative Appeals Tribunal (AAT). The AAT held that the self-education expenses were not deductible as the expenses were not incurred in gaining or producing the taxpayer's assessable income from casual work at the university. That income was merely incidental to the studies. The expenses were incurred in getting future work, and they came at a point too soon.

Although the above cases are not identical to your circumstances, the principles have relevance. You currently have skills and experience in a relevant area. However, there is no evidence to show that the studies are necessary in carrying out your current roles. Even though a course may broaden your knowledge and make a person a better employee and better able to carry out their duties, as with the cases quoted above, the courts have held that this is not sufficient to enable the expenditure to be allowed as a deduction. There are many courses and experiences which may help an employee however this does not automatically mean that the associated expenses are deductible.

While some of the subjects provide knowledge and skill that are used in your current role, this is not sufficient to show that your expenses are an allowable deduction.

You do not earn any assessable income for your role with entity B, therefore although the studies may assist in this role, the associated expenses are not incurred in earning assessable income.

Your role with entity B is for two days a week.

That is, you work three days a week for these roles and receive minimal income. It is not considered that the purpose of your studies was to help you earn this assessable income.

Your circumstances are similar to those in Gupta's Case, in that you were studying while working part time. It is considered that your study is not to assist you in your part time work, but to enable you to obtain qualifications for some other purpose.

In your case, there is no implicit or explicit condition to pursue the studies. Such qualifications are not essential although may improve your performance in your current employment. The studies provide you with qualifications that are far in excess of the requirements of your current positions and cannot be said to be sufficiently related to the earning of your assessable income.

Although entity A reimburses work related expenses, your expenses were not reimbursed as the company did not see it as a company expense. This reinforces the fact that such qualifications are not essential in your current role.

While the studies may assist you in the performance of your income earning activities, equally true to say that virtually any experience and the acquisition of any knowledge will contribute to the individuals own development with consequent benefit to the employment duties. Yet expenses incurred in acquiring this knowledge and experience do not become expenses incurred in gaining your assessable income. The benefit obtain from your studies is only incidental as your studies are providing you with knowledge and skill far greater than what is required in your part time work.

By applying the principles as established in the above cases to your case, it is considered that the expenses of the studies are not themselves directly attributable to the derivation of your assessable income. The link to your current roles is not sufficient and the fact that you do not earn any assessable income from one role and minimal income from your other part time role supports the fact that the studies are not incurred in earning assessable income.

Consequently, the self-education expenses incurred in undertaking the studies do not have the necessary and relevant connection with the earning of your current assessable income. You are therefore not entitled to a deduction for self-education expenses under section 8-1 of the ITAA 1997.