Edited version of your written advice

Authorisation Number: 1012769621258

Ruling

Subject: Self-education

Question 1

Will the scholarship received be included in your assessable income?

Answer

No

Question 2

Will the expenses associated with undertaking a course be deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

This ruling applies for the following period(s)

Income year ended 30 June 2015

The scheme commences on

1 July 2014

Relevant facts and circumstances

You are a teacher.

You intend travel to x to undertake a course at the x on x.

To assist with the course you applied for a scholarship from the x.

On the x you were notified of your success.

The course will run between x and x, and you will be a full time student during this period.

At the completion of the course you will not have to provide any service to or be employed by the x.

The scholarship committee has requested that upon completion of your studies, you send them a short report of your experience.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 section 51-60

Reasons for decision

Question 1

Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year. However, if an amount is exempt income, it is not included in the assessable income of a taxpayer (section 6-15 of the ITAA 1997).

Item 2.1A of the table in section 51-10 of the ITAA 1997 provides that, subject to the exceptions and special conditions contained within section 51-35 of the ITAA 1997, income received by way of a scholarship, bursary, educational allowance or education assistance by a full time student at a school, college or university is exempt from income tax.

For the scholarship to be exempt from income tax: 

• the taxpayer must be a full time student at a school, college or university;

• the taxpayer must be in receipt of a scholarship and the scholarship must be provided principally for educational purposes; and

• there must be no condition that the taxpayer be an employee of the scholarship provider or enter into any contract with the scholarship provider that is wholly or principally for labour.

In your circumstance we have determined the course to which the scholarship related is not deductible and it follows that any scholarship received would not be assessable as ordinary income. However even if the course were deductible then the scholarship would meets all of the above criteria, and consequently would be exempt from income tax under section 51-10 of the ITAA 1997.

Question 2

Deductions generally

Section 8-1 of the 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, or a provision of the ITAA 1997 prevents it.

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

• 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, and

• 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).

To determine whether your expenses are deductible, 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.

Self-education expenses

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.

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.

TR 98/9 explains that expenses incurred on overseas study tours or sabbatical, on work-related conferences or seminars, or attending an educational institution are deductible if the necessary connection with a person's income producing activity exists. However, the ruling also explains that if the subject of the self-education is too general in terms of the taxpayer's income-earning activities, the necessary connection between the self-education expense and the income earning activity does not exist.

In Case R47 84 ATC 380; (1984) 15 ATR 824, the taxpayer, a French language teacher, claimed a deduction for part of the expenses in travelling to France. The trip was not undertaken at the request of the taxpayer's employer. She asserted that the trip increased her teaching skills.

The Taxation Board of Review stated that the fact that the taxpayer became a better teacher because of the trip did not mean that expenses were incurred in the course of gaining her assessable income as a teacher. The expenditure was incurred in relation to a period during which the taxpayer was without obligation to render service to her employer. Notwithstanding that her experience would be of value when she resumed performing the duties of her employment, the essentially recreational nature of the journey did not alter.

In Case Q83 83 ATC 418, the taxpayer, a high school French and Indonesian language teacher, travelled overseas with her husband. She claimed a deduction for travel expenses relating to time spent in France and Indonesia. The taxpayer conceded that a promotion did not depend on travelling overseas. The Taxation Board of Review disallowed the taxpayer's claim. They found that even though language teachers can, in the course of ordinary tourist activities, derive benefits as teachers, this fact does not transmute tourist activities into business activities.

In Case R94 84 ATC 628 a college librarian was not allowed overseas travel expenses in making a study tour of China organised by the Library Association. The benefits derived by the taxpayer might have made her a better librarian, but the nexus between the outgoings and deriving assessable income was too remote. The taxpayer voluntarily made the trip and the expenditure was essentially of a private nature.

Case M51 80 ATC 352 (Case M51) involved a husband and wife who were partners in a sugar cane farming business. They went overseas on a three week 'Sugar and Pineapple Tour' organised by the Farmers and Graziers Co-operative Company Ltd. Members of the tour spent most of the time sightseeing, although they did visit some farming areas. The taxpayer's expenditure was not deductible as the tour was similar to an ordinary excursion trip, except that it had a small bias in favour of people having a rural interest. The fact that they gained many useful insights on sugar cane growing and probably picked up some useful ideas, did not mean that the expenditure was incurred in gaining or producing assessable income.

Application to your circumstances

We consider that your circumstances are on point with the case law mentioned above. Those claims were rejected because the teachers were not able to establish a positive connection between the overseas travel and the performance of their duties as teachers. Ultimately the claims were based on a general proposition that the overseas travel has made the taxpayers better able to carry out their duties which, of itself, is not sufficient to enable the expenditure to be allowed as a deduction.

The course offered by the x involves both study of x and excursions to places of x significance. While we acknowledge the benefits of attending the course, the knowledge to be gained from your course is not considered to be incurred in the course of gaining your assessable income. There are many experiences and places of interest which may be relevant to your employment however this does not automatically mean that the associated expenses are deductible.

In light of the fact that attendance was voluntarily and not part of your normal employment duties and a large portion of the course is dedicated to sightseeing we consider the essential character of the course is private and not deductible under section 8-1 of the ITAA 1997.