Edited version of private advice

Authorisation Number: 1051649782764

Date of advice: 30 April 2020

Ruling

Subject: Self-education expenses

Question 1

Are you entitled to a deduction for your airfares and accommodation expenses incurred to undertake a training course?

Answer

No.

Question 2

Are you entitled to a deduction for a training bond (the bond) you were required to pay before undertaking the training course that was not repaid?

Answer

No.

This ruling applies for the following period

Year ended 30 June 2019

The scheme commenced on

1 July 2018

Relevant facts and circumstances

You hold qualifications in a particular industry.

You entered into contract with a recruitment agency.

The recruitment agency provides workers to a business operating in your industry.

You were not an employee of the recruitment agency or the business.

Under the terms of the contract:

·         you agreed to undertake a training course, and

·         you were required to pay a training bond that could be withheld if you did not fulfil your obligations under the contract.

You did not complete the training course and the recruitment agency retained the bond.

You incurred expenses in relation to the course, including airfares and accommodation.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Reasons for Decision

Self-education expenses fall for consideration under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997). This section 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.

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.'

The expenditure must therefore be related to the production of assessable income and not incurred at a point too soon to be deductible (FC of T v. Maddalena (1971) 45 ALJR 426; (1971) 2 ATR 541; 71 ATC 4161).

Taxation Ruling TR 98/9 Income tax: deductibility of self-education expenses incurred by an employee or a person in business (TR 98/9) provides the Commissioner's view on the deductibility of 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 self-education enables the taxpayer to maintain or improve that skill or knowledge, the self-education expenses are allowable as a deduction (paragraph 13 of TR 98/9).

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, the self-education expenses are allowable as a deduction (paragraph 14 of TR 98/9).

However, no deduction is allowable for self-education expenses if the study is designed to enable a taxpayer to open up a new income-earning activity, whether in business or in the taxpayer's current employment. Such expenses of self-education are incurred at a point too soon to be regarded as incurred in gaining or producing assessable income (paragraphs 15 and 58 of TR 98/9).

Airfares and accommodation

The training course you undertook was a means of having your existing qualifications upgraded.

At the time you undertook the Course, you were unemployed. Therefore, the course was not undertaken to maintain or improve an existing skill or knowledge used in any 'current' employment. Nor, can it be said that the studies related to any 'current' income-earning activity as an independent contractor providing services, as you were not yet qualified to provide these services.

Although you already hold qualifications in the industry, the study was designed to enable you to open up a new income-earning activity. Therefore, the expenditure was incurred at a point too soon to be regarded as incurred in gaining or producing assessable income and is not an allowable deduction under section 8-1 of the ITAA 1997.

Training bond

You were required to pay a training bond prior to commencing the Course. For the bond to be deductible it must be related to the production of assessable income.

The Courts have considered the deductibility of similar payments on numerous occasions. For example, in Case P20 (1963) 14 TBRD 97 a surveyor had entered into a bond with his employer prior to receiving his professional qualification. The bond provided that he reimburse his employer the employer's cost of his training should he resign his employment within 5 years of receiving his qualification. The taxpayer resigned 4 months after receiving his qualification and was required to repay the costs. The Board of Review stated:

The expenditure in question flowed directly from the taxpayer's breach of covenant. It was a consequence of the taxpayer's termination of his employment with the department in order to take up duties with a new employer, and even though an increased salary flowed from this move, in no sense can it be said that the outgoing in question was incurred in the course of gaining or producing assessable income from the new source. It was not truly incidental or relevant to the actual derivation of salary income.

ATO ID 2002/902 Income Tax Deductibility of damages paid for breach of employment contract - repayment of self-education expense (ATO ID 2002/902) considers the issue of whether a payment for a breach of employment contract is deductible under section 8-1 of the ITAA 1997.

The facts outlined in ATO ID 2002/902 provide that the taxpayer undertook a self-education course that was sponsored by their employer. The terms of the sponsorship contained in the employment contract were:

·   The Employer pays all expenses related to the self-education course

·   The taxpayer continues employment with the employer for an agreed period after the completion of the self-education course; and

·   The taxpayer repays the self-education expenses for not meeting the terms of the contract.

The taxpayer did not continue employment with the employer for the agreed period after completion of the self-education course. The taxpayer's employer requested payment for damages, being the self-education expenses paid on behalf of the taxpayer and the taxpayer complied with the request.

It was considered that the payment for damages (being repayment of self-education expenses) to the employer by the taxpayer was not related to the earning of assessable income. The payment represented expenditure incurred by the taxpayer for breaching the terms of the employment contract. The expenditure was not considered to have been incurred as a self-education expense.

Accordingly, the damages paid for breach of employment contract in relation to the self-education expense claim were not an allowable deduction under section 8-1 of the ITAA 1997 as they were not incurred in gaining or producing assessable income.

In your case, in accordance with the contract you were required to pay the bond prior to commencement of the Course. The bond relates to your obligations under the contract and was withheld by the recruitment agency due to the non-completion of the contract. The payment of the bond was not related to the earning of assessable income.

In addition, if the payment of the bond was considered to be a self-education expense it would not be deductible for the same reasons that your expenditure for the Course was not allowable.

You are not entitled to a deduction for the amount of the bond under section 8-1 of the ITAA 1997.