Edited version of your written advice

Authorisation Number: 1013035185037

Date of advice: 16 June 2016

Ruling

Subject: Self-education expenses

Question

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

Answer

No.

This ruling applies for the following period

Year ended 30 June 20zz

The scheme commenced on

1 July 20yy

Relevant facts

You commenced employment with entity A in 20xx on a casual basis with a qualification. You were employed on a casual basis due to the level of education and qualification that you held. Your hours of work were issued to you based on availability of your team mates with higher qualifications.

It was identified you did not have the relevant certification to allow you to gain specified work.

You were encouraged to upskill by completing a number of training courses to provide you with the appropriate qualifications in order to give you a greater opportunity to transition into permanent employment in place A.

As a requirement of your Employment Agreement, you needed to obtain the specified qualifications to ensure permanent employment.

One course ran for a period of six months and the other course ran for nine months.

Course 1 was not available part time, online or via correspondence. The course was an intense course that restricted the ability to work while attending classes. You did this course at place B then travelled to place C for course 2.

The courses gave you a higher level of understanding in your field. Without completing these courses you wouldn't be able to meet the standards set to be able to do specified work and your income producing activities would be limited. In doing the courses you were hoping for a promotion at a higher rate of pay and increased job security.

You did not work while doing the courses and received no employment income in the 20yy-zz financial year.

You did the courses to maintain your role, however you wanted to ensure that you were able to get a permanent part time or permanent full time position when offered.

You started to earn assessable income from entity A again later in 20zz after finishing your studies.

As a result of your demonstrated ability in your role and the extra knowledge from the training you have since been employed on a permanent part time basis with the capacity to backfill vacancies in the roster.

You incurred costs for travel, internet, phone, tutoring, TAFE fees, professional fees, certificate fees, textbooks, stationery and computer.

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 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.

The deductibility of self-education expenses falls for consideration under section 8-1 of the ITAA 1997. Therefore, in considering whether you are entitled to a deduction, it is necessary to consider whether the expenses were incurred in the course of gaining or producing your assessable income.

The courts have considered the meaning of 'incurred in gaining or producing assessable income'. In Ronpibon Tin NL & Tong Kah Compound NL v. Federal Commissioner of Taxation (1949) 78 CLR 47; (1949) 56 ALR 785; (1949) 8 ATD 431 the High Court stated that:

'For expenditure to form an allowable deduction as an outgoing incurred in gaining or producing the assessable income it must be incidental and relevant to that end. The words "incurred in gaining or producing the assessable income" mean in the course of gaining or producing such income.'

Taxation Ruling TR 98/9 Income tax: deductibility of self-education expenses incurred by an employee or a person in business discusses the circumstances under which self-education expenses are allowable as a deduction. A deduction is allowable for self-education expenses if a taxpayer's current income earning activities are based on the exercise of a skill or some specific knowledge and the subject of the self-education enables the taxpayer to maintain or improve that skill or knowledge (Federal Commissioner of Taxation v. Finn (1961) 106 CLR 60, (1961) 12 ATD 348).

Similarly, if 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 his or her current income earning activities in the future, a deduction is allowable.

However, no deduction is allowable for self-education expenses 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). The expenses are incurred at a point too soon to be regarded as incurred in gaining or producing assessable income. They are incurred in getting, not in doing, the work which produces the income (High Court decision in FC of T v. Maddalena 71 ATC 4161; (1971) 2 ATR 541 (Maddalena's case)).

Where a person is not working and incurs self-education expenses, the necessary connection between the outgoings and the earning of assessable income will not usually exist. That is, the expenses will generally be incurred at a point too soon to be regarded as incurred in gaining or producing assessable income and will therefore not qualify for deduction under section 8-1 of the ITAA 1997.

Many cases have applied the principle established in Maddalena's case. In Case U186 87 ATC 1066; (1987) 18 ATR 3943, the taxpayer was a solicitor who resigned from his employment to study overseas for a master's degree. His employer stated that he would be re-employed on his return. On completion of his studies he did in fact resume his employment with the firm of solicitors.

The Tribunal held that although the expenses were incurred with a view to the future generation of income, they were not incurred "in the course of" earning that future income. A connection between an expense and a future source of assessable income is not sufficient to be deductible.

In FC of T v M I Roberts 92 ATC 4787; (1992) 24 ATR 479, the taxpayer was a mine manager who undertook a Masters of Business Administration after he was retrenched. On completion of the course he was employed as a mine manager by another company.

The court held that the expenses were "moneys which were spent to obtain a new employment, albeit one in a better position and on higher wages. Being the cost to an employee of obtaining his employment, they do not form an outgoing incurred in the course of earning the wages payable in the employment."

The issue of self-education expenses and casual employment was considered in Gupta v. FC of T 2002 ATC 2319; (2002) 51 ATR 1205 (Gupta's case). In this case the taxpayer was an Indian citizen who arrived in Australia in July 1997 on a student visa, with restricted work conditions. While in India, he attained a Certificate of Proficiency in Information systems and had worked as a trainee technical assistance with mainly data entry responsibilities. The taxpayer enrolled in the Bachelor of Computer Science course at the University of Western Sydney. From about March 1998, the taxpayer also began working on a casual basis at the university's School of Computing and Information Technology as a computer laboratory assistant. After completing his course he remained in the employ of the university as a tutor and researcher. The taxpayer sought deductions in the 1999 and 2000 tax years in relation to his self-education expenses. The Commissioner denied the claims.

The taxpayer objected to his assessments and claimed he was maintaining or improving his skills necessary for his work and there was a direct connection between the expenditure and assessable income. However, the Commissioner claimed that the expenses were incurred to enable him to gain his degree and were not incurred in the process of earning his assessable income as a part time employee.

The Commissioner's decision was affirmed by the AAT. The AAT held that the essential character of the expenses was to qualify the taxpayer so that he could get ahead within the IT industry to a more highly paid position.

They found that on completion of the degree, however, the taxpayer would have acquired more highly developed skills, qualifying him to undertake more responsible and demanding work than previously. It was held that the expenses were not incurred in gaining or producing the taxpayer's assessable income from casual work at the university that income was merely incidental to the studies. The expenses were incurred in getting future work, and they came at a point too soon.

The Tribunal rejected the submission that the applicant enrolled in the course so that he could be more proficient at the type of duties he had performed in the past. The expenses were not incurred in gaining or producing the taxpayer's assessable income from casual work at the university that income was merely incidental to the studies. The perceived connection between the self-education expenses and Mr Gupta's assessable income was absent. Accordingly, the expenses were of a non-deductible private nature.

In your case, although your situation is slightly different to the above cases, the principles are relevant.

You were employed casually prior to doing the courses. Your self-education expenses were not incurred in the course of earning income from your casual employment as you were not working at the time of the courses. Because you were not engaged in employment duties at the time of the courses, your self-education expenses were not incurred in the course of any actual income earning activity. There is no direct connection between your self-education expenses and your income earning activity.

Also, the connection between the expenses and the earning of future income is too remote to justify a deduction. That is, the expenses were incurred at a point too soon to be regarded as having been incurred in gaining or producing your income from future positions.

The fact that the courses were part of your employment agreement is not a determining factor. You were not working for the 15 months when you did the courses. Also, even though you received permanent part time employment with the same employer after the courses, this is not the decisive factor in determining the deductibility of your self-education expenses. Your expenses were incurred to help you get permanent employment albeit with the same employer. Although you are still in the same field, the courses have given you more highly developed skills qualifying you to work on more tasks which you previously could not do. That is the course has opened up new employment opportunities.

The example in paragraph 46 of TR 98/9 referred to an employee who took six months leave without pay to undertake a course. Your 15 months leave is substantially longer leave than this and therefore the connection with your previous and future employment is too remote, unlike the example.

In accordance with TR 98/9 and the principles outlined in the above court cases, your expenses were incurred at a point too soon to be regarded as incurred in gaining or producing your assessable income. Therefore, the expenses are not deductible under section 8-1 of the ITAA 1997.