Edited version of your written advice

Authorisation Number: 1051438971095

Date of advice: 9 October 2018

Ruling

Subject: Work Related Expenses – Self-Education

Question

Are your self-education expenses for the Master of Business Administration (MBA) allowable deductions?

Answer

No.

This ruling applies for the following periods:

Period ended 30 June 20XX

Period ended 30 June 20XX

Period ended 30 June 20XX

Period ending 30 June 20XX

Period ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You enrolled in the MBA early 20XX at a University to be completed by 20XX. At the time of enrolment you were not employed.

Your background was in a different area with strong technical skills but a lack of knowledge and skills in business management.

Your reason for enrolling in the MBA was to increase your business management skills and knowledge.

You paid for your first MBA subjects in the middle of 20XX.

You paid for your subsequent subjects over a period a years.

You commenced employment with an employer in middle of 20XX ceasing employment with them in late 20XX.

You commenced employment with another employer in early 20XX.

Your letter from your employer acknowledged that the MBA study was an influential factor in hiring you.

Your employment roles were part of small teams.

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).

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 an unemployed person incurs self-education expenses, the necessary connection between the outgoings and the earning of assessable income will not usually exist. That is, where there is a break in employment, 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 a deduction under section 8-1 of the ITAA 1997.

Many cases have applied the principle established in Maddalena’s case. The cases that provide guidance in the present situation are examined below.

FC of T v Klan 85 ATC 4060; (1985) 16 ATR 176; (1985) 80 FLR 320; 85 ATC 4060

The expenses incurred by the taxpayer in undertaking the course of study were characterised as outgoings incurred to enable him to obtain employment in new and more remunerative positions on his return to Australia. The expenses were not allowable deductions because they were not incurred in gaining or producing assessable income as the taxpayer was in between jobs during the duration of the course. The perception of a connection between expenditure and the future earning of assessable income is not by itself sufficient to justify a deduction. Such expenses were incurred at a point too early in time to be deductible.

Case T75 86 ATC 1072; (1986) 17 ATR 1219

The taxpayer was an anthropologist who earned income from short term lecturing positions at various universities. While he was between positions, he travelled overseas to study the people of South East Asia. This research was to be used in the taxpayer's future employment at universities.

The Tribunal held that as the expenditure was incurred while the taxpayer was unemployed; it was not incurred in the course of gaining or producing assessable income.

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.

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."

In your case, although your situation is slightly different to the above cases, the principles are relevant. You were not currently employed when you enrolled in your course. Your course expenses are not incurred in the course of earning income from your employment as you were not employed at the time of commencement of the course. Because of your break in employment, your self-education expenses are 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. The connection between the expenses and the earning of future income is too remote to justify a deduction. That is, the expenses will be incurred at a point too soon to be regarded as having been incurred in gaining or producing your income from future positions.

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

Your personal circumstances are acknowledged, with payment for your subjects made after you commenced employment, however, the legislation does not allow a deduction for these expenses in your situation.