Edited version of private advice

Authorisation Number: 1051524056378

Date of advice: 11 June 2019

Ruling

Subject: Income Tax - Self-Education Expenses

Question

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

Answer

Yes

This ruling applies for the following periods:

Financial year ending 30 June 20XX

Financial year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You commenced work at XYZ in late 20XX as a Production Superintendent.

Several years later, in early 20XX, you submitted an application for a Masters of Business (MBA) course.

Your intention for undertaking the course was to enhance your skills and knowledge that would assist you in your current role at XYZ.

Early the same year, you were accepted to an MBA program at a top business school in Country A.

You paid the first instalment of the course fees.

In the following month, you paid the second instalment of course fees.

Later that year, you received a letter from your Manager stating that you had discussed with them on several occasions your intention to complete an MBA course. Following your admission to the course the letter also states that you had been offered leave without pay to attend study with the option to return to your current employment at XYZ.

Your stated intention was to accept the option to return to your current employment before starting the course later in the same year.

In late 20XX you paid the third instalment of your course fees.

Approximately one week later, you received a letter from XYZ's Human Resources department providing information on the relevance between the self-education (MBA) and the nature of your work as Production Superintendent at XYZ.

A few days later, you were notified by management in a group consultation that you were going to be made redundant. This was followed some two or three days later by your first redundancy letter advising that the suspension of operations at XYZ had made your position redundant, and that the company was unable to redeploy you in an alternative position. The termination date is noted as X late 20XX (i.e. around five weeks later).

In late 20XX you received a second redundancy letter confirming your redundancy pay, termination entitlements, exit procedures and support services.

In late 20XX your employment with XYZ was terminated via the involuntary redundancy and you left the company.

You commenced the MBA course approximately two weeks later in 20XX.

On X early of the following year, you paid the fourth instalment of course fees. You completed the MBA course on X later that year.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Taxation Ruling TR 98/9

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 the course of gaining or producing the assessable income, but are not allowable to the extent that they are of a capital, private or domestic nature.

A number of significant court decisions have determined that, for an expense to satisfy the tests outlined in section 8-1 of the ITAA 1997:

·        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 connection 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)

·        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 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).

In Thomas v FC of T (2015) ATC10-404, [2015] AATA 687 (Thomas's case), the taxpayer was an associate director at National Australia Bank (NAB). During that time, he decided to undertake further study on a full-time basis, of which NAB was generally supportive. The taxpayer applied for and was accepted into an MBA course at Ecole des Hautes Etudes Commerciales de Paris (HEC Paris). A payment agreement was signed by the taxpayer, with his father as guarantor. The agreement stated that it was a commitment to pay the course fees in three instalments, the first of which was non-refundable. Just after the taxpayer had paid for his flights, visa and the first instalment of fees he was made redundant by NAB. The Commissioner accepted that the money paid for the flights and the visa were incurred when they were paid, prior to the taxpayer being unemployed, and an allowable deduction. The AAT held that the taxpayer had not incurred the second and third instalments while employed as the commitment to pay was not definite. Only the first instalment of fees was an allowable deduction as it was the only amount deemed non-refundable and incurred in gaining or producing assessable income.

The principle arising from this case is that where the self-education expense is incurred during the relevant related employment, the expense is deductible. 'Incurred' covers both the situation where payment is actually made and where a commitment to pay is definite, although payment itself may not occur during the relevant employment.

In FC of T v Thomas, the court made it clear that the taxpayer would only be definitively committed to payment if the educational institution could enforce payment if the taxpayer decided not to go ahead with the course, i.e. the taxpayer was 'committed to paying the fees no matter what'.

This is to be contrasted where the outgoings are no more than 'impending, threatened or expected', in which case they are not deductible (New Zealand Flax Investments Pty Ltd v FC of T [1938] HCA 60).

Applied to your circumstances

At the time you enrolled in the MBA course you were employed as a Superintendent and it is accepted that the MBA course would enhance your existing skills and knowledge as required in that position. The course would also likely lead to an increase in your assessable income. This satisfies the test of the expense being connected to your assessable income at the time.

You were made redundant after paying a portion of your course fees, meaning that you were no longer receiving assessable income that could be linked to the expense. However, as discussed above, course fees paid prior to being made redundant were considered to be deductible in Thomas's case.

In your case, at the time you incurred the course fees, the course was directly related to your employment making the fees paid on X mid 20XX, X mid 20XX and X late 20XX deductible expenses.

The following year, you paid the final instalment for the MBA Course. Even though the payment can be linked to the course, the payment was not incurred until it was paid as you were not definitively committed to pay until actual payment. This date is some time after the date on which you were made redundant (X late 20XX) and therefore during a period when you were not earning assessable income. The necessary connection between the final payment and your income earning activities does not exist. Therefore no deduction for this expense is allowable under section 8-1 of the ITAA 1997.