Edited version of your written advice

Authorisation Number: 1012995386922

Date of advice: 12 April 2016

Ruling

Subject: Self education expenses

Questions and answers

1. Are the fees you incurred in relation to undertaking the university course deductible in the income year ended 30 June 20XX?

No.

2. Are the fees you incurred in relation to undertaking the university course deductible in the income year ended 30 June 20XY?

Yes.

This ruling applies for the following periods:

Year ended 30 June 2014

Year ended 30 June 2015

The scheme commences on:

1 July 2013

Relevant facts and circumstances

You undertook a course of study at a foreign University and incurred course fees in doing so.

At the time the study offer was originally made, you were employed by a law firm as a legal practitioner and practised commercial, public and administrative law.

Amongst other things, in carrying out your employment role, you were required to demonstrate sound technical knowledge, demonstrate excellent legal research abilities, have the ability to identify applicable law, write in plain English and develop communication and negotiation skills.

The University stated that the course was designed to serve outstanding law students from common law backgrounds and the academic standard was significantly higher than that required in a first law degree.

In the first half of 20XX, you received a letter from the University which stated that:

• you were being offered a position to undertake the course of study at the University commencing in the second half of the year;

• the offer was conditional on you meeting the academic conditions (original transcript of your degree) and the financial conditions (proof of sufficient funding to cover the course fees);

• as long as you satisfied the specified conditions you would be sent a final confirmation letter and request that you sign and return a copy of a contract as a condition of enrolment;

• you were entitled to cancel your acceptance of a place at the University for any reason within a period of X working days beginning on the day after the day on which the University received notification of your acceptance of the offer. To facilitate this you had to advise in writing that you wished to cancel your acceptance of the offer of a place.

You emailed the University to accept the conditional offer.

You formally advised your employer that you had accepted the study offer.

You received an email from the University confirming that you had satisfied the academic conditions of the offer.

In the first half of 20XX, you received an email and letter from a College of the University which stated that:

• you had been offered a place at the College to undertake the course;

• as long as you satisfied the conditions set out in the letter and any imposed by the University, you would be sent a final confirmation letter and request that you sign and return a copy of a contract as a condition of enrolment;

• you were required to accept the offer by a certain date;

• you were entitled to cancel your acceptance of a place at the College for any reason within a period of X working days beginning on the day after the day on which the College received notification of your acceptance of the offer. To facilitate this you had to advise in writing that you wished to cancel the contract between you and the College.

The letter from the College also contained a form which related to the financial conditions. Completion of the form would satisfy the financial conditions of the study offer.

The form included paragraphs that stated that the University and College contracts would include the legal obligations to pay the fees and charges due from you to the University and College.

In the first half of 20XX, you emailed the form to the College stating that you had the funds to cover the course fees.

In the first half of 20XX, you also:

• applied for a credit card which allowed for foreign currency transaction and conversion fees to be waived;

• received an email from the College stating that you had been allocated accommodation at the College and a room contract would be posted out in the coming weeks for signing;

• booked your overseas flight and paid a cash deposit;

• confirmed with your employer that you had been granted a leave of absence;

• also applied for another credit card which allowed for fee free foreign currency transactions.

After 30 June 20XX, you received a confirmation of offer letter from the University which:

• confirmed you had fulfilled all the conditions required of you to take up your place at the University;

• contained a contract;

• stated that you had to sign and return the contract to become an enrolled student of the University; and

• stated that once you had returned the signed contract, your student registration process would begin.

A clause of the contract stated that by signing and returning the document, you were agreeing to pay the fees and charges due from you to the University.

You sent a copy of the signed contract to the University by email and post.

The University confirmed receipt of the contract.

After 30 June 20XX, you received a confirmation of offer letter from the College which stated that you:

• had fulfilled all the conditions required of you to be able to take up your place at the College;

• needed to download a copy of a contract; and

• had to sign and return the contract to become an enrolled student of the College.

A clause of the contract stated that you were undertaking to pay the fees and charges due to the University and to the College.

You returned the contract to the College.

Later in the year you commenced your studies at the College.

Within a week of commencing your studies, the College issued you with an invoice for the fees payable and payment was due within X days from the date of the notice. You paid the amount due within the period specified.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1936 section 82A

Income Tax Assessment Act 1936 subsection 82A(2)

Reasons for decision

Self-education expenses

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.

For self-education expenses to be deductible they must have a relevant connection to the taxpayer's current income earning activities.

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 incurred by an employee or a person in business (TR 98/9). In accordance with
TR 98/9, self-education expenses are deductible if:

• a taxpayers 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, and

• the study of a subject of self-education objectively leads to, or is likely to lead to, an increase in a taxpayers income from his or her current income-earning activities in the future.

However, the fact that the study will enable a taxpayer to get employment, to obtain new employment or to open up a new income earning activity is not a sufficient basis in itself for self-education expenses to be deductible.

In your case, you obtained a University law degree and were employed as a legal practitioner at a law firm. You later applied for and were accepted to complete a course of study at a foreign University. In undertaking the course, you incurred course fees totalling $X.

Based on the information provided, it is evident that your income-earning activities are based on the exercise of certain skills and specific knowledge and it is accepted that the course you undertook enabled you to maintain or improve those skills and knowledge. Further, it is reasonable to conclude that the study is likely to lead to an increase in income from your current income-earning activities in the future.

Therefore, you are entitled to a deduction for the fees you incurred in undertaking the course of study.

Prescribed course of education - $250 reduction

As your self-education expenses relate to a course of study provided by a university and are allowable under section 8-1 of the ITAA 1997, the expenses also fall within the definition of 'expenses of self-education' in section 82A of the Income Tax Assessment Act 1936 (ITAA 1936).

Expenses of self-education, as defined in subsection 82A(2) of the ITAA 1936, include expenses that are 'necessarily incurred' for or in connection with a prescribed course of education which means an organised course of study, full-time or part-time, provided by schools, colleges or universities.

Only the excess of the self-education expenses over $250 may be considered for deduction under section 8-1 of the ITAA 1936. In performing this calculation, it is not necessary that the expenses of self-education be deductible (provided they are 'necessarily incurred' in connection with a prescribed course of education). Expenses that are deductible under provisions other than section 8-1 are also taken into account in the section 82A calculation.

However, having established the maximum amount (i.e., the net amount of self-education expenses over $250), any expenses that meet the requirements of section 8-1 may be claimed in full up to the maximum amount. Instructions on how to calculate the amount can be found on our website at:

https://www.ato.gov.au/individuals/income-and-deductions/in-detail/education-and-study/claiming-self-education-expenses---specific-expenses/?page=6#_250_reduction

When the expenses were incurred

The Commissioners view on when an expense is incurred is discussed in Taxation Ruling TR 97/7 Income tax: section 8-1 - meaning of 'incurred' - timing of deductions (TR 97/7).

TR 97/7 states that there is no statutory definition of the term 'incurred'. As a broad guide, you incur an outgoing at the time you owe a present money debt that you cannot escape. However, this broad guide must be read subject to the propositions developed by the courts. These propositions are discussed in paragraph 6 of TR 97/7 as follows:

The courts have been reluctant to attempt an exhaustive definition of a term such as 'incurred'. The following propositions do not purport to do this, they help to outline the scope of the definition. The following general rules, settled by case law, assist in most cases in defining whether and when a loss or outgoing has been incurred:

a) a taxpayer need not actually have paid any money to have incurred an outgoing provided the taxpayer is definitively committed in the year of income. Accordingly, a loss or outgoing may be incurred within section 8-1 even though it remains unpaid, provided the taxpayer is 'completely subjected' to the loss or outgoing. That is, subject to the principles set out below, it is not sufficient if the liability is merely contingent or no more than pending, threatened or expected, no matter how certain it is in the year of income that the loss or outgoing will be incurred in the future. It must be a presently existing liability to pay a pecuniary sum;

b) a taxpayer may have a presently existing liability, even though the liability may be defeasible by others;

c) a taxpayer may have a presently existing liability, even though the amount of the liability cannot be precisely ascertained, provided it is capable of reasonable estimation (based on probabilities);

d) whether there is a presently existing liability is a legal question in each case, having regard to the circumstances under which the liability is claimed to arise;

e) in the case of a payment made in the absence of a presently existing liability(where the money ceases to be the taxpayer's funds) the expense is incurred when the money is paid.

TR 97/7 provides additional guidance citing the relevant case law as follows:

Presently existing liability

16. A loss or outgoing may be incurred for the purposes of section 8-1 even though no money has actually been paid out. In W Nevill & Company Ltd v. FC of T (1937) 56 CLR 290 at 302 it was said:

'the word used is 'incurred' and not 'made' or 'paid'. The language lends colour to the suggestion that, if a liability to pay money as an outgoing comes into existence, [the section is satisfied] even though the liability has not been actually discharged at the relevant time ... it is only the incurring of the outgoing that must be actual; the section does not say in terms that there must be an actual outgoing - a payment out.'

17. This proposition was recently confirmed by the High Court in FC of T v. Energy Resources of Australia Limited 96 ATC 4536; (1996) 33 ATR 52 (Energy Resources) when, quoting from James Flood, it said (ATC at 4539; ATR at 56):

'Section 51(1) "has been interpreted to cover outgoings to which the taxpayer is definitively committed in the year of income although there has been no actual disbursement".'

18. The liability must be 'more than impending, threatened or expected' - refer New Zealand Flax (CLR at 207). '[W]hat is clearly necessary is that there should be a presently existing liability' - Nilsen Development Laboratories (CLR at 624). It is not a presently existing liability if it is contingent - refer James Flood (CLR at 506); Nilsen Development Laboratories (CLR at 207); Marbren Pty Ltd v. FC of T 84 ATC 4783 at 4788-4789;(1984) 15 ATR 1145 at 1152.

The above principles were summarised by Barwick C J and Gibbs J respectively in Nilsen Development Laboratories Pty Ltd v Federal Commissioner of Taxation [1981] HCA 6; (1981) 144 CLR 616 (Nilsen Development Laboratories). Barwick C J stated:

11. ……there can be no warrant for treating a liability which has not "come home" in the year of income, in the sense of a pecuniary obligation which has become due, as having been incurred in that year..………….It may not disqualify the liability as a deduction that, though due, it may be paid in a later year. That part of Sir Owen Dixon's statement in New Zealand Flax Investments Ltd. v. Federal Commissioner of Taxation (1938) 61 CLR, at p 207 which presently needs emphasis is that the word "incurred" in s. 51 (1) "does not include a loss or expenditure which is no more than pending, threatened or expected": and I would for myself add "no matter how certain it is in the year of income that that loss or expenditure will occur in the future". (at p624)

Gibbs J stated:

4. ………The principle to be applied in deciding whether a loss or outgoing was "incurred" is clear enough. It is not necessary that there should have been any actual disbursement: New Zealand Flax Investments Ltd. v. Federal Commissioner of Taxation [1938] HCA 60; (1938) 61 CLR 179, at p 207 ; Emu Bay Railway Co. Ltd. v. Federal Commissioner of Taxation [1944] HCA 28; (1944) 71 CLR 596, at p 606 ; Federal Commissioner of Taxation v. James Flood Pty. Ltd. [1953] HCA 65; (1953) 88 CLR 492, at pp 506-507 ; and see King v. Commissioner of Inland Revenue (1974) 2 NZLR 190, at pp 194-195 . Indeed, it was suggested in Federal Commissioner of Taxation v. James Flood Pty. Ltd. that it is not necessary that there should be an immediate obligation enforceable at law whether payable presently or at a future time, or that the obligation should be indefeasible. It is not now necessary to consider whether those suggestions should be accepted as correct. But what is clearly necessary is that there should be a presently existing liability. In Federal Commissioner of Taxation v. James Flood Pty. Ltd., this was expressed by saying that the provisions of s. 51 (1) cover "outgoings to which the taxpayer is definitively committed in the year of income although there has been no actual disbursement", and that those provisions "do not admit of the deduction of charges unless . . . the taxpayer has completely subjected himself to them". In other words, s. 51 (1) does not cover "a loss or expenditure which is no more than impending, threatened or expected": New Zealand Flax Investments Ltd. v. Federal Commissioner of Taxation (1938) 61 CLR, at p 195 . (at p627)

5. If these principles are applied to the present case, the question is whether the taxpayer was under a present liability to make a payment to its employees in respect of leave. The answer is that it was not. The employees were entitled to leave, but they were not entitled to payment. The entitlement to payment would not arise until the employees took leave (or died or left the employment). The event on which the entitlement of the employees to payment depended had not occurred. There was a certainty that a liability to make payments in respect of leave would arise in the future, but it had not arisen. The present is not a case in which there was an immediate obligation to make payment in the future, or a defeasible obligation to pay, or a present obligation which as a matter of law was unenforceable - there was no accrued obligation to make any payment at all. There was no loss or outgoing "incurred" within s. 51 (1). (at p628)

In Federal Commissioner of Taxation v. James Flood Pty Ltd [1953] HCA 65; (1953) 88 CLR 492 (James Flood) and Nilsen Development Laboratories the taxpayers argued that they had incurred expenses in the current income year that were due to be paid in the next income year. The expenses related to the liability to make leave payments that were due to be paid to employees in the next income year.

Although the court in both cases acknowledged that it in the current income year it was certain that the amounts would be paid in the next income year, in the current year the payments were contingent on the employees actually taking the leave or resigning in the next year. There was no present obligation to make the payments and the expenses could not be said to have been incurred in the current year.

For an amount to be deductible in a year of income, it is not sufficient if the liability to pay is merely contingent or no more than pending, threatened or expected, no matter how certain it is in the year of income that the loss or outgoing will be incurred in the future. It must be a presently existing liability to pay a monetary sum; a liability the taxpayer cannot escape.

Application to your circumstances

In your case, you commenced the course of study in the second half of 20XX (the income year ended 30 June 20XY) and were invoiced for, and paid, the fees shortly afterward. However, you state that you incurred the fees in the income year ended 30 June 20XX as you were definitively committed to paying the fees in that year.

To briefly summarise, in the income year ended 30 June 20XX, you:

• received a conditional offer from the University to undertake a course of study at a related College of the University;

• accepted the offer and satisfied the academic conditions of the offer;

• received a conditional offer from the College offering you a place at the College to undertake the study;

• accepted the offer and satisfied the financial conditions of the offer;

• signed a form as part of satisfying the financial conditions which included paragraphs that stated that the University and College contracts would include the legal obligations to pay the fees and charges due from you to the University and College;

• were allocated accommodation at the college;

• arranged a leave of absence with your employer;

• applied for credit cards which had fee free overseas transactions;

• booked your overseas flight to undertake the study.

In the income year ended 30 June 20XY, you:

• received a confirmation of offer letter from the University which stated that you had to sign and return a contract to become an enrolled student of the University;

• signed and returned the contract which included a clause stating that by signing and returning the document, you were agreeing to pay the fees and charges due from you to the University;

• received a confirmation of offer letter from the College which stated that you had to sign and return a contract to become an enrolled student of the College;

• signed and returned the contract which included a clause that stated you were undertaking to pay the fees and charges due to the University and to the College;

• commenced the course of study at the College;

• were issued with an invoice for payment of the University and College fees and you paid the amount due.

You state that your acceptance of the study offers and satisfaction of the required conditions in the year ended 30 June 20XX created a legally binding contract between you and the University and College (as evidenced by the right to cancel clause included in the offer letters, for example) and this, along with the other actions you took in making the preparations to put yourself in the position to undertake the course, demonstrated that you were 'definitively committed' to incurring the fees in that income year.

However, in the year ended 30 June 20XY, you were required to sign and return the University and College contracts as a condition of enrolling at the University and the College. These contracts included the duties and undertakings of the University and College in providing services to you and also your undertakings including those relating to the legal obligations to pay the fees to the University and College.

Without returning the student contracts, it is unclear how you could have enrolled at the University and College and taken your place in the course. It also unclear how the University and College could demand any payment for course fees from you if you were not enrolled and they had not commenced providing the agreed service by way of the course of study to you.

Although the receipt of the confirmation letters from the University and College after 30 June 20XX was outside your control and the dates may have been random or arbitrary, it does not change the fact that this is what actually occurred.

We accept that you were personally committed to taking up the course of study in the year ended 30 June 20XX as evidenced by the actions you took, but do not consider that this is the same as being 'definitively committed' as discussed by the courts.

Based on the information provided:

• the payment of the course fees was contingent on you returning the signed student contracts and enrolling as a student which occurred in the year ended 30 June 20XY;

• although it appeared certain that you would pay the fees in the year ended 30 June 20XY, the payment was no more than impending, threatened or expected in the year ended 30 June 20XX; and

• your liability to pay the fees had not 'come home' and it was too early to say that you had an inescapable obligation to pay the University and College fees in the year ended 30 June 20XX.

The course fees were incurred in the year ended 30 June 20XY and you are entitled to a deduction for the fees in that year.