Edited version of your written advice

Authorisation Number: 1012809464448

Ruling

Subject: Course fees

Question:

Can you claim a deduction for course fees?

Answer:

No.

This ruling applies for the following period:

Year ending 30 June 2015

The scheme commenced on:

1 July 2014 

Relevant facts

You hold qualifications as a tradesperson.

You were made redundant from your employment.

You decided to commence your own sole trading activity.

You were issued with an ABN.

You could not undertake this work as you were not licenced to provide services to the general public.

You completed a licencing course and other courses to enable you to provide services to the general public.

You commenced providing services after you completed the courses.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Reasons for decision

Summary

You are not entitled a deduction for the course fees as the expenses were incurred before the commencement of your business. It is not considered that your business commenced until you started providing services. The activities you undertook prior to this are considered to be preparatory activities undertaken to enable you to start the business of providing services.

Detailed reasoning

Self-education expenses

Self-education expenses generally fall for consideration under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997).  This section allows a deduction for losses and outgoings which are incurred in the course of gaining or producing assessable income, unless the losses or outgoings are capital, or are of a capital, private or domestic nature.

In accordance with Taxation Ruling TR 98/9, expenses of self-education will satisfy the requirements of section 8-1 of the ITAA 1997 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, or

• 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 their current income-earning activities in the future.

Whether such a connection exists is a question of fact to be determined by reference to all the facts of the particular case.

However, no deduction is allowable for self-education expenses if the study is designed to enable a taxpayer to obtain new employment or start earning income from a new income earning activity. Such expenses of self-education are incurred at a point too soon to be regarded as incurred in gaining or producing assessable income (Federal Commissioner of Taxation v. Maddalena 71 ATC 4161; (1971) 2 ATR 541.

As noted in the Administrative Appeals Tribunal in Case U166, 87 ATC 957 by Dr Gerber at p. 958:

In short, to come within the purview of sec. 51(1), the cost of better qualifying oneself in point of knowledge or skill must be undertaken either in a current and relevant employment (cf. F.C. of T. v. Finn (1961) 106 C.L.R. 60) or during the subsistence of an associated business undertaking (cf. F.C. of T. v. Highfield 82 ATC 4463).

Therefore, if a taxpayer is not currently engaged or employed in an area that makes the study necessary or desirable, the self-education expenses are not deductible.

Before a business can be said to have commenced there are three indicators that must be present these are:

• purpose, intention and decision

• acquisition of a business structure, and

• actual commencement of business operations.

As noted by Brennan J in Inglis v Federal Commissioner of Taxation (1979) 10 ATR 493; 80 ATC 4001, the level of activity is important in deciding whether a business is being carried on. 

Brennan J stated at ATC 4004-4005; ATR 496-497 that:

The carrying on of a business is not a matter merely of intention.  It is a matter of activity. Yet the degree of activity which is requisite to the carrying on of a business varies according to the circumstances in which the supposed business is being conducted.

For example, if your business activity is a primary production activity, involving the planting and cultivating of trees, then the planting of the trees could be seen as the commencement of that business. Alternatively, if your business activity is characterised as the provision of services, the business would generally be considered to commence once you began conducting the services for a fee.

The expenses associated with the establishment of a business are not deductible under section 8-1 of the ITAA 1997. The expenses are incurred at a point too soon. They are not regarded as being incurred in carrying on the business (FC of T v Maddalena (1971) 2 ATR 541; 71 ATC 4161).

In your case, you hold trade qualifications and you were made redundant. You decided to operate a sole trading activity with the intention of providing services. In order to provide these services to the general public you were required to complete a contractors licencing course. You undertook other courses to enable you to provide services to the public.

While the undertaking of the courses enabled you to improve your skill or knowledge as a tradesperson this does not mean the expenditure will be incurred in gaining or producing that assessable income as at the time of incurring the expenditure no business activity was being undertaken. The business activity did not commence until you began conducting services for a fee after you completed the courses. Therefore, any expenses prior to this were incurred at a point too soon to be considered to be incurred in earning income from your current income-earning activities as a sole trader.

The only other circumstance in which the costs would be deductible is if as a result of undertaking the courses it was likely to lead to an increase in your income in your current income earning activities.

In Federal Commissioner of Taxation v. Hatchett (1971) 125 CLR 494 a deduction for self-education expenses was allowed as the self-education course allowed the taxpayer to earn more in the future and entitled him to be paid more for doing the same work without promotion. At all times the taxpayer was employed by the same employer.

We do not believe that the circumstances of Hatchett's case are relevant to your situation as you had ceased your employment with your former employer and opened up a new income activity as a sole trader. While we acknowledge your intention in undertaking the courses was to improve your skills and knowledge to broaden your work opportunities to earn a higher income these facts are not sufficient to make the expenses deductible.

When viewed objectively the course fee expenses you incurred are more properly characterised as expenses incurred for the purposes or opening up a new income earning activity. Therefore, you are not entitled to a deduction for the course fees as the expenses were incurred at a point too soon to be deductible under section 8-1 of the ITAA 1997.