Edited version of your written advice

Authorisation Number: 1012840716072

Date of advice: 15 July 2015

Ruling

Subject: Work related expenses - self-education

Question

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

Answer

No

This ruling applies for the following period

Year ended 30 June 2015

The scheme commences on

1 July 2014

Relevant facts and circumstances

You are a professional from overseas.

You have been working in Australia for nearly five years in your chosen profession.

You ceased employment with your employer.

You commenced a course of study after ceasing your employment.

You incurred course expenses after ceasing your employment.

You are undertaking the course of study to upskill your overseas knowledge to the equivalent Australian knowledge to remain/be more effective when undertaking Australian roles.

You are undertaking this study whilst you are seeking your next professional role.

You are currently unemployed.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Reasons for decision

Work-related 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 of a capital, private or domestic nature.

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 (TR 98/9) sets out the circumstances in which self-education expenses are allowable as a tax deduction. To claim a deduction for work related self-education expenses, you must have met one of the following conditions when you incurred the expense

• 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 (FC of T v. Finn (1961) 106 CLR 60;(1961 12 ATD 348) (Finn's Case); 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 (FC of T v. Hatchett (1971) 125 CLR 494; 71ATC 4184; (1971) 2ATR 557 (Hatchett's Case).

Therefore, provided there is sufficient connection between a course of self-education and current income earning activities, you are entitled to claim a deduction for your self-education expenses.

However, self-education expenses will not be deductible if the study is intended to:

• enable you to get employment,

• enable you to obtain new employment, or

• to open up a new income-earning activity (whether in business or in your current employment).

Paragraph 48 of TR 98/9 refers to the decision of the High Court in FC of T v. Maddalena 71 ATC 4161; (1971) 2 ATR 541 (Maddalena's Case). That case established that no deduction is allowable for self-education expenses if the study is designed to enable a taxpayer to get employment or to obtain new employment. The expenses would be incurred at a point too soon to be regarded as incurred in gaining or producing assessable income.

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 expense and the income- earning activity does not exist.

The types of expenses related to self-education which are considered to be allowable under section 8-1 of the ITAA 1997 include:

• course or tuition fees of attending an educational institution (including student union fees, but excluding Higher Education Loan Program (HELP) payments)

• the cost of text books; and

• airfares, accommodation and meal expenses incurred on a study tour

We acknowledge that you have referred to FC of T v Kropp 76 ATC 4406; (1976) 6 ATR 655 (Kropp case), however your facts are materially different to the facts of this case. We believe your facts are closer to those of FC of T v. M I Roberts 92 ATC 4787; (1992) 24 ATR 479 (Roberts case)

The Federal Court in Roberts case applied the principle in Maddalena when it overturned an Administrative Appeals Tribunal (AAT) decision allowing a mine manager a deduction for expenses associated with a Master of Business Administration degree (MBA).

Mr Roberts was a qualified mining engineer who became a mine manager. He accepted a place at an American University to study full-time for an MBA and shortly thereafter he was retrenched, with his consent, by his employer. Before completing his studies Mr Roberts accepted an offer of employment from another mining company and, after graduating, started work as a mine manager at a significantly higher salary than he previously earned.

Mr Roberts claimed deductions for self-education expenses while studying in the United States. The Commissioner disallowed the deductions and the taxpayer objected. The AAT held that there was a sufficient connection between the self-education expenses and Mr Roberts' assessable income. The Commissioner appealed to the Federal Court, submitting that the expenses were not deductible for the following reasons:

1. the taxpayer was not in employment at the time the expenses were incurred and, accordingly, there was insufficient connection between the expenses and the gaining or producing of assessable income

2. they were prerequisite to the gaining of assessable income, and

3. they were private in nature.

In overturning the AAT decision, Cooper J considered that the expenses were incurred for the purpose of obtaining new employment, albeit in a better position and at a higher salary, rather than in the course of earning the salary payable in the employment. Accordingly, the expenses were not deductible.

This view has been further supported by case law. In Case W39, 89 ATC 395, the taxpayer was an unemployed lecturer who went to a conference relevant to her previous income earning activity. The conference expenses were disallowed as it was not relevant to her current income earning activity (ie unemployed).

Case W85, 89 ATC 740 involved a recreation and leisure officer who left his job to study a Masters of Tourism course full time. He then took a job as a lecturer teaching tourism subjects. The Masters' degree expenses were not allowed as the taxpayer was studying for a new occupation. The taxpayer argued that as he was employed in the tourism industry before and after the course, it was not opening up a new field. The Tribunal ruled that a council leisure officer and a lecturer were separate occupations.

In Case U186, 87 ATC 1066, the taxpayer was a solicitor who resigned from work to study a law masters' degree full time. When the degree was completed, he recommenced work with the same law firm. He tried to claim the masters' degree expenses. Some of the expenses were incurred whilst the taxpayer was working before the study commenced. The Tribunal held that all of the expenses in dispute were incurred with a view to the future generation of income and with the expectation that the future income levels would be greater than would have been the case if the expenses had not been incurred and that the increment would be more than sufficient to make up for the expenses so incurred and the income lost to the taxpayer during his period of further study. Therefore, the expenses were not incurred in the course of deriving his income as a solicitor and were not an allowable deduction.

From these cases, any study undertaken whilst the taxpayer was unemployed or receiving benefits was not considered to be deductible. In all cases, it was held that the expenses incurred related to the provision of a new occupation usually at a higher level of remuneration than their previous job. It did not matter whether they resigned or had their jobs terminated by their employer. It also did not matter whether they were staying in the same field as all of the cases mentioned above did not have a major change in their field of employment.

In your case, you ceased employment with your employer prior to the commencement of your studies and prior to incurring the self-education expenses. There is not a sufficient connection between the course you are undertaking and your current income earning activities (ie unemployed) and therefore the self-education expenses you have incurred are not considered to be deductible.