Edited version of your written advice

Authorisation Number: 1051242905861

Date of advice: 28 June 2016

Ruling

Subject: Self-education expense

Your current income earning activities consists solely of shareholder dividends and other passive investment income. There is insufficient nexus between your income earning activities and the self-education expenses to allow a deduction under section 8-1 of the Income Tax Assessment Act 1997.

Question 1

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

Answer

No

This ruling applies for the following periods:

Year ended 30 June 2015

Year ended 30 June 2016

The scheme commences on:

1 January 2015

Relevant facts and circumstances

You are a Director of Company A and Company B.

Company A and Company B both perform consulting services

You do not receive any personal income from Company A. Company B receives consulting fees for work you perform for Company A.

You do not receive any personal income from Company B but instead are renumerated by fully franked dividends.

You completed a Master’s Degree during 2015.

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.

A number of significant court decisions have determined that for an expense to be an allowable deduction:

● it must have the essential character of an outgoing incurred in gaining assessable income or, in other words, of an income-producing expense (Lunney v. FC of T (1958) 100 CLR 478),

● there must be a nexus between the outgoing and the assessable income so that the outgoing is incidental and relevant to the gaining of assessable income (Ronpibon Tin NL v. FC of T (1949) 78 CLR 47), and

● it is necessary to determine the connection between the particular outgoing and the operations or activities by which the taxpayer most directly gains or produces his or her assessable income (Charles Moore Co (WA) Pty Ltd v. FC of T (1956) 95 CLR 344; FC of T v. Hatchett 71 ATC 4184).

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).

Paragraph 38 of TR 98/9 discusses the High Court ruling in Commissioner of Taxation v. Finn (1961) 106 CLR 60;(1961) 12 ATD 348, in which Windeyer J states that:

'... a taxpayer who gains income by the exercise of his skill in some profession or calling and who incurs expenses in maintaining or increasing his learning, knowledge, experience and ability in that profession or calling necessarily incurs those expenses in carrying on his profession or calling.'

At paragraph 42, TR 98/9 discusses the nature of the study and explains that:

'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. Self-improvement or personal development courses are generally non-deductible although a deduction may be allowable in certain circumstances.'

Thus, self-education expenses incurred by a taxpayer will qualify for deduction under section 8-1 of the ITAA 1997, if there is a sufficient nexus to the production of assessable income and the improvement of a skill or some specific knowledge.

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.

Application to your circumstances

Your assessable income consists solely of fully franked dividends you receive from Company B and other passive investment income. You do not receive a salary, wages or director’s fees from any of the companies for which you perform services.

Paragraphs X and Y of Company A’s constitution make it clear that Directors of the company are to be paid the remuneration that the Company determines by resolution. The constitution also states the Company may also pay any expenses Director’s incur in relation to company business.

According to Company A’s constitution a dividend may only be paid out of the profits of the company or out of the share premium account if the dividend is satisfied by the issue of Shares to Members of the Company. Further to this it is the directors who shall determine that a dividend is payable and fix the amount, time and method of payment. It is the performance of the company and the decision of majority of the directors that determines if a dividend is paid and the amount paid.

No resolutions were passed in the 2015 or 2016 financial year that related to the remuneration of Directors instead Company B received consulting fees for services you performed for Company A. It cannot be said you earned assessable income as a Director of Company A.

The only income you receive from Company B is fully franked dividends. You have supplied a Shareholder dividend statement which clearly indicates the income you receive is in respect of the shares you own in Company B and not for services performed as a director or by the exercise of your skill in some profession or calling as an employee.

There is an insufficient nexus between your income earning activities, which are passive, and the Master’s Degree. While the skills taught in an Master’s Degree may lead to improved performance as a company director you do not earn any wages, salary or director’s fees which would have the sufficient connection to allow a deduction for self-education expenses. Therefore an insufficient connection exists between you completing an Master’s Degree and your income producing activities to allow a deduction under section 8-1 of the ITAA 1997.