Edited version of your written advice

Authorisation Number: 1012810669780

Ruling

Subject: Deduction-aircraft qualification

Question 1:

Are you entitled to claim a deduction for medical expenses and a licence application fee?

Answer:

No.

Question 2:

Are you entitled to claim a deduction for the cost of maintaining a licence?

Answer:

No.

Question 3:

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

Answer:

No.

This ruling applies for the following periods:

Year ended 30 June 2014
Year ending 30 June 2015
Year ending 30 June 2016

The scheme commenced on:

1 July 2013 

Relevant facts

You obtained a licence in country A.

You paid medical fees, an application fee and flying expenses to convert and maintain your licence in country B.

You are employed in a non-pilot's role.

Your have provided a list of your duties.

It is not a requirement of your employment to hold a pilot's licence as you are not responsible for flying an aircraft.

You are intending to undertake a course that will allow you to fly a multi-engine aircraft (the course).

You will undertake study during your own time.

Undertaking the course will not impact on your pay level in your current position with your employer.

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, relate to the earning of exempt income, or are prevented from being deductible by a provision of the income tax legislation.

It is a long standing principle that a taxpayer does not satisfy section 8-1 of the ITAA 1997 merely by demonstrating a casual connection between the expenditure and the derivation of income. What must be shown is a closer and more immediate connection. The expenditure must be incurred in gaining or producing your assessable income (Lunney v Commissioner of Taxation (1958) 100 CLR 478). These principles have been affirmed by the High Court in Commissioner of Taxation v Payne [2001] HCA 3.

Capital expense
An expense will usually be capital in nature where it is incurred with the intention to create an asset or advantage of a lasting and enduring nature (British Insulated & Helsby Cables Ltd v. Atherton (1926) AC 205; (1926) 10 TC 155).

Capital expenditure often produces an enduring benefit, that is, the structure of the advantage or asset. Revenue expenditure is often repetitious or recurring in nature and often does not produce assets or advantages of an enduring nature.

Deductibility of an application fee

The classic formulation of the matters to be considered in determining whether a loss or outgoing is of a capital or revenue nature is that of Dixon J in Sun Newspapers Ltd v. Federal Commissioner of Taxation (1938) 61 CLR 337; (1938) 5 ATD 87; (1938) 1 AITR 403 where his Honour said:

There are, I think, three matters to be considered, (a) the character of the advantage sought, and in this its lasting qualities may play a part, (b) the manner in which it is to be used, relied upon or enjoyed, and in this and under the former head recurrence may play its part, and (c) the means adopted to obtain it; that is, by providing a periodical reward or outlay to cover its use or enjoyment for periods commensurate with the payment or by making a final provision or payment so as to secure future use or enjoyment.

In your case, the cost incurred in converting a licence is capital in nature as it provides an enduring benefit in the form of an ongoing right to hold a licence in country B. In addition, you acquired this benefit by incurring a one off cost to secure the licence for your future use.

Accordingly a deduction under section 8-1 of the ITAA 1997 is not allowable for the cost associated with the licence application fee as the expense is capital in nature.

Medical fees

Generally the costs of medical expenses are not an allowable deduction under section 8-1 of the ITAA 1997 in relation to a person employment as it is considered to be a private expense.

Taxation Ruling TR 95/19 applies to employees in the airline industry and deals with work-related deductions. For those employed in the airline industry a deduction is allowable for the expenses associated with medical examinations for the renewal of a pilot licence provided there is a nexus to the taxpayer's employment, that is, the taxpayer is engaged as a pilot.

In your case, at the time of incurring the medical expenses you were not engaged as a pilot nor was it a requirement of your employment to hold a pilot licence. Accordingly as there is insufficient nexus to the incurring of the medical expenses and the earning of your assessable income, your medical expenses are considered private in nature and not deductible under section 8-1 of the ITAA 1997.

The cost of maintaining a licence
Paragraph 23 of TR 95/19 states: 'a deduction is allowable for the cost of renewing licences held by an airline employee in respect of his or her employment. A deduction is not allowable for the cost of obtaining the initial licence.'

To determine whether the costs to maintaining your licence is an allowable deduction, your employment circumstances need to be considered to see if the necessary connection can be established between the expense and the performance of your current duties.

In your case, at the time of incurring the flying expenses to maintain your licence you were not engaged as a pilot with your employer nor was it a requirement of your employment to hold a pilot licence.

Accordingly as there is insufficient nexus to the incurring of the expenses and the earning of your assessable income, the expenses are not deductible under section 8-1 of the ITAA 1997.

The course
Self-education expenses generally fall for consideration under section 8-1 of the ITAA 1997.

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.

The costs of self-education expenses are not deductible if the study is to enable a 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).This includes studies relating to a particular profession, occupation or field of employment in which the taxpayer is not yet engaged. Such expenses are incurred at a point too soon to be regarded as incurred in gaining or producing assessable income (See paragraphs 15 and 48-62 of TR 98/9). The decision of the High Court in Federal Commissioner of Taxation v. Maddalena (1971) 45 ALJR 426; (1971) 2 ATR 541; 71 ATC 4161 (Maddalena's case) establishes the principle above.

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 expenses and the income-earning activity does not exist.

In your case, you have referred to Federal Commissioner of Taxation v. Studdert (1991) 91 ATC 5006; 22 ATR 762 (Studdert's case) as a basis for allowing a deduction for the course expenses you are intending to incur as you believe you are required to have an understanding of the overall working of an aircraft's flight.

Your case can be distinguished from Studdert's case in that you already hold a commercial pilot licence and have the skills, knowledge and abilities to understand the working of an aircraft's flight as opposed to the flight engineer in Studdert's case who was seeking to obtain an initial pilot licence.

Also, in Studdert's case the flight engineer supervised and regulated the delivery of power to the aeroplane from the jet engines. A flight engineer also has an extensive list of duties both on and off the ground such as inspecting the aircraft, carrying out pre-flight checklist, monitoring all of the computer systems and having an expert understanding of all the plane's mechanical instruments so the pilot can confer with the flight engineer if they have any questions or concerns about a operation of the plane's systems and instruments to successful take-off and land the plane.

A review of your position statement does not show that in your current role you are required to operate an aircraft or have an understanding of a flight engineer in relation to the overall working of an aircraft's flight systems and instruments as noted in Studdert's case and it is for these reasons noted above we consider that Studdert's case has no application to your current circumstances.

Further at present your current position requires no specific skills or qualifications to operate multi-engine aircraft.

It is also noted that your employer does not consider the course to be sufficiently connected to your employment to justify them paying you an allowance or reimbursing you for any expenses in relation to it.

When viewed objectively your undertaking of the course which principally deals with the operation of multi-engine aircraft will provide you with specialised skills and abilities in advance of those that are required in your current non-pilot position as the course appears to be specifically designed to allow pilots to fly in full instrument meteorological conditions at all phases of the flight, both during the day and at night in any operation permitted by the grade of pilot's licence held. There is little doubt that the course is designed to enable a qualified pilot to upgrade their skills to operate a multi-engine aircraft and as such it is considered that you will have obtained skills which are not required in your current position.

It is for these reasons noted above we consider there is an insufficient connection between the skills and knowledge required in your current position and the course that you intend to undertake. Therefore, the expenses associated with the course are not incurred in earning your assessable income.

The only other circumstance in which the costs would be deductible is if the qualification was likely to lead to an increase in your income from your current employment position with your current employer in the future.

From the information provided in your case there is no evidence that undertaking the course will lead to an increase in your pay level in your current position as acknowledged by you. Further, from the facts provided the only circumstances your income would increase is if you applied for a new position with your current employer as a pilot. Given this, you would change your position with your employer and as consequence undertake different duties in the role of a pilot. Therefore as noted above the costs of self-education expenses are not deductible if the study is to enable you to open up a new income-earning activity in your current employment.

For example: John is a registered nurse working in at a private hospital and currently studying to become a doctor. John gains an employment position as a doctor with his current employer after completing his studies. A deduction is not allowed as the study enables John to open up a new income-earning activity with his current employer as a doctor.

Similarly in your case, you are engaged in a non-pilot role with your current employer and intend undertaking a course that will equipment you with additional skills; that is, to fly a multi-engine aircraft as a pilot which is not required in your current position. Therefore it is considered the current study will enable you to open up a new income-earning activity in your current employment.

In conclusion after applying the above self-education principles to your circumstances and the facts, it is considered that there is insufficient nexus between your current income earning activities and the course. The course expenses are not an allowable deduction under section 8-1 of the ITAA 1997 as they are not incurred in gaining or producing your assessable income.