Edited version of your written advice

Authorisation Number: 1012935494014

Date of advice: 2 February 2016

Ruling

Subject: Repayment of loan to employer

Question 1

Can you claim a deduction for the interest expenses you incurred on loans from your employer that were used for the purpose of obtaining a commercial X licence in a previous year?

Answer

No.

Question 2

Can you claim a deduction for the repayment of principal on these loans?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 2015

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You entered into a Cadet X Loan Scheme.

You also entered into a Cadet X Scholarship Scheme.

Conditions of both deeds provide that:

A. You (the Borrower) intend to enrol or have enrolled in a cadet X training course (the training course) at a training establishment.

B. At your request, the Employer is prepared to advance to you a loan (and scholarship by way of a loan) to pay for part of the fees and charges of the training course, subject to the terms of the deeds.

C. You are aware that one of the conditions of the loan is that you must accept any offer of employment with the Employer on successful completion of the training course in accordance with clause 4 (Employment and secondment) and not resign from employment designated the Employer for a minimum period of five years (six years in the case of the scholarship loan) from the commencement of employment as defined in the said clause 4.

You agreed to this condition.

D. The Employer has agreed to employ you upon the successful completion of the training course, or within a period of three months following the successful completion of the training course.

Clause 2.1.2 of the Cadet X Loan Scheme deed states:

'2.1.2 …... Upon the Borrower completing five years of employment with the Employer, the outstanding balance of the loan is partially forgiven by an amount of …..'

Clause 2.1 of the Cadet X Scholarship Scheme deed states:

'In the case of the Borrower who is employed by the Empoyer following the successful completion of the training course, the scholarship loan will be waived and forgiven if the Borrower is employed by the Employer for a continuous period of six (6) years from the commencement of the Borrower's employment….'

The overarching purpose of both loans was to pay for the costs of such things as; your training, aircraft hire, instructor fees, ground training and exam costs to enable you to obtain the qualifications you required to be employed.

You commenced the commercial X's course.

The course was full-time study, during which you were paid a petrol allowance and all other living expenses were borne by the Employer.

You successfully completed this course and were subsequently employed as a X.

Your employment ended after a period of employment spanning less than six years.

You were invoiced for the outstanding balance of your X and scholarship loans with interest, payable in full to the Employer.

The outstanding balance of these loans was paid.

Prior to the commencement of the course you were employed in an unrelated field and you were undertaking full-time university studies.

Your previous training, experience and qualifications were the completion of your General Flight Progress Test (GFPT) and you were at the stage of obtaining your private X's licence.

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, or relate to the earning of exempt income.

Loan interest

Taxation Ruling TR 98/9 sets out the circumstances in which self-education expenses are allowable as deductions, and states that these expenses are deductible under section 8-1 of the ITAA 1997 where they have a relevant connection to the taxpayer's current income earning activities.

This ruling also states that a deduction is allowable for interest incurred on borrowed monies where the funds are used to pay for self-education expenses associated with a course of education, which enables a taxpayer to maintain or improve his or her skill or knowledge or is likely to lead to an increase in income from the taxpayer's current income earning activities.

However, a deduction is not allowable for self-education expenses if the study is designed 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). The expenses come at a point in time too soon to be regarded as being incurred in gaining or producing assessable income.

Paragraphs 117 and 118 of TR 98/9 also provide the following example which is similar to your circumstances:

117. After completing his secondary education, Alex studied commerce as a full-time student at a private university. He borrowed $30,000 in 1995, repayable over 5 years, and used the funds to pay course tuition fees. He completed his degree the following year and obtained employment with an accounting firm in early 1997.

118. No deduction is allowable for interest incurred on the loan. The funds borrowed were not used for an income-producing purpose, but related to a course of study undertaken by Alex before he obtained his current employment. Accordingly, there is not a sufficient connection between the interest expense and Alex's current income-earning activities.

In your case, although the Employer paid you an allowance whilst you were studying, and it could be argued that you were under their employ at that time, you were not employed by the Employer as a commercial X until some months after the completion of the course which was undertaken to enable you to gain the required initial qualifications to become employed in this capacity; therefore, the course does not have the required nexus with your current employment at that time. The X's course enabled you to obtain employment as a commercial X. Prior to the commencement of this course; you were working in an unrelated field and a full time university student.

Whilst it is acknowledged that you had completed your GFPT and you were at the stage of obtaining your private X's licence, it is the Commissioner's view that your study for your commercial X's licence opened up a new income-earning activity for you and therefore was incurred at a point too soon.

Loan principal

In consideration of the deductibility of the principal component of your loans, any repayments of the principal amount of a loan for any purpose are outgoings of a capital nature.

Furthermore, any interest that has been capitalised on a loan over the period of that loan takes on the same capital character as the loan itself. As your repayment of these amounts is of a capital nature, it is also not a deductible expense.

Accordingly, you are not entitled to a deduction for the costs incurred in repaying either the capital or the interest components of the loans used to obtain your commercial X's licence under section 8-1 of the ITAA 1997.

Additional note:

If such circumstances presented that you could have been taken to be an employee X at the time you undertook this course, consideration would then have been given to the deductibility of your costs as self-education expenses in line with Taxation Ruling TR 95/19 Income Tax: airline employees - allowances, reimbursements and work-related deductions.

Paragraph 23 of this ruling considers the common work-related expenses incurred by airline employees and to the extent to which they are allowable as deductions. Included in this list are licences and the ruling states that 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.

This is inline with our view set out further above that the costs of your commercial X's course undertaken to obtain a commercial X's licence were incurred at a point too soon to be considered incurred in the course of earning assessable income as a commercial X.

You queried the deductibility of the repayment of the loan that was used to pay the course costs and we have advised that the repayment is capital in nature and not deductible. You should also note that the course costs themselves are also not deductible in the income year that you incurred those costs as they were incurred at a point too soon as discussed above.