Edited version of private advice

Authorisation Number: 1051748099631

Date of advice: 8 September 2020

Ruling

Subject: Self-education expenses

Question 1

Are all your self-education expenses allowable deductions?

Answer 1

No

Question 2

Are part of your self-education expenses, detailed in Group A, allowable deductions?¹

Answer 2

Yes

This ruling applies for the following periods:

Year ending 30 June 2020

Year ending 30 June 2021

Year ending 30 June 2022

Year ending 30 June 2023

Year ending 30 June 2024

Year ending 30 June 2025

The scheme commences on:

01 July 2019

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 are studying with Institution A and expect to complete your course in 20XX.

You are studying part-time for a formal qualification, Masters of Business Administration (MBA) (Technology).

You commenced the course on XX February 20XX.

The course can be completed anywhere between X to X years.

Each individual subject cost $X,XXXX.

You are paying for the course under the FEE-HELP program.

You are not being reimbursed for the subject fees.

The MBA course comprises 12 subjects as follows:

Mandatory commencing subject

·         Leadership

Core subjects

·         Marketing Management.

·         Accounting and Financial Management.

·         Economics in Management Practice.

·         Managing People & Organisations.

·         Business Analytics.

Technology specialisation subjects

·         Project Management.

·         Digital Innovation.

·         Digital Strategy.

·         Managing with Digital Technology.

·         Enterprise Risk Management

Capstone (required subject)

·         Strategic Consulting Project

You are self-employed and derive assessable income from XX via XX.

X is an online platform for freelancers or sellers, to offer their digital services to customers globally. Each service offered is called a "gig". X is listed. Services offered include graphic design and writing.

You do not have an employment contract, job description or business plan.

You listed your work activities undertaken in order to earn your assessable income whilst undertaking the study.

In 20XX you co-founded a partnership with Partner. You outlined the operations of the partnership and your role.

Studying the course will directly impact your business through improving your skills and likely increase of income from operation efficiency changes, accounting improvement and

reducing potential risks.

Subject outline and explanation of how each subject relates to current income earning activities are grouped under Group A and Group B as follows:

Group A

Marketing Management

Accounting and Financial Management

Digital Innovation

Digital Strategy

Managing with Digital Technology

Group B

Leadership

Economic in Management Practice

Managing People and Organisations

Business Analytics

Project Management

Enterprise Risk Management

Strategic Consulting Project

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 section 26-20

Income Tax Assessment Act 1936 section 82A

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, or relate to the earning of exempt income.

Taxation Ruling 98/9 Income tax: deductibility of self-education expenses incurred by an employee or a person in business (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).

The deductibility of self-education expenses was also considered by the High Court in FCT v Maddalena 71 ATC 4161; (1971) 2 ATR 541. The High Court held that self-education expenses incurred to obtain new employment or to open up a new income-producing activity do not have a sufficient relationship with a taxpayer's current income-producing activities. They relate to future streams of income, rather than present streams of income, and so are incurred at a point too soon.

In other significant court decisions such as Lunney v. FC of T; Hayley v. FC of T (1958) 100 CLR 478 at 497-498; (1958) 11 ATD 404 at 412, the High Court of Australia has indicated that the expenditure must have the essential character of an outgoing incurred in gaining assessable income or, in other words, of an income-producing expense. There must be a nexus between the outgoing and the assessable income so that the outgoing is incidental and relevant to the gaining of the assessable income (Ronpibon Tin NL v. FC of T (1949) 78 CLR 47 at 56; (1949) 8 ATD 431 at 435).

Paragraph 42 of TR 98/9 states:

42. 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. The cost of self-improvement or personal development courses is generally not allowable, although a deduction may be allowed in certain circumstances. In Case Z42 92 ATC 381; AAT Case 8419 (1992) 24 ATR 1183, a senior newspaper journalist, whose duties involved interviewing people for feature articles and making presentations to potential advertisers, was allowed a deduction for the cost of a speech course because it was incurred in maintaining or increasing his ability in his current employment and therefore was necessarily incurred in carrying on that employment.

Case U109 87 ATC 657 demonstrates the principle that just because expenditure may lead to the taxpayer being 'better' at their employment does not necessarily mean that the expenditure is deductible. In that case the taxpayer was a science teacher who specialised in geology and was the head of the school science department. He incurred expenditure to undertake a 17 day trip to Indonesia organised by a natural museum history society of which he was a member. During the course of the trip he visited several volcanoes and other geological sites, and attended a geological congress. The taxpayer took many slides of the geological sites and prepared a taped commentary which he used in his teaching on his return. The Administrative Appeals Tribunal (AAT) concluded that the fact that the taxpayer may have been a better teacher after the travel was not enough to demonstrate a sufficient connection between the travel and their income earning activities and that the expenditure was not deductible.

Paragraph 14 of TR 98/9 states:

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.

In case FC of T v. Hatchett (1971) 125 CLR 494; 71 ATC 4184; (1971) 2 ATR 557, Menzies J held that expenses incurred by a primary school teacher in relation to the submission of theses to gain a Teacher's Higher Certificate were allowable. His Honour considered that the certificate expenses were related to the actual gaining of income because possession of the certificate entitled Mr Hatchett to move to another pay scale and, therefore, to earn more money in the future. It also entitled him to be paid more for doing the same work without any change in grade (125 CLR at 498; 71 ATC at 4186; 2 ATR at 559).

Furthermore, in case FC of T v. Studdert, Hill J said that an expense normally is allowable if it can be shown to contribute or be likely to contribute to increased income, but noted that such a finding is not a prerequisite for deductibility (91 ATC at 5013-5014; 22 ATR at 770).

In your case, in determining whether a deduction is allowable for self-education expenses we have to examine the entire course as a whole in terms of the connection between the course and your income earning activities. If the course as a whole is considered to be relevant and incidental to your income earning activities, then the entire course would be deductible.

You are currently self-employed earning your assessable income by X via X. You also X.

The activities you undertake utilise skills and knowledge.

We acknowledge that the learning outcomes, skills and competencies that some of the subjects impart and develop are applied in your current work activities. However, based on the information you provided about your work activities, the necessary connection between all subjects and your current work activities does not exist. There may be some minor connection, but the specific knowledge gained from some subjects are unrelated to your work duties.

You can claim a deduction for study and self-education expenses if the course directly relates to your current work activities and results in or is likely to result in an increase in your income from your current work activities. However, you have not objectively shown this has or will occur as a result of undertaking the course.

Subjects outlined in Group A have the necessary connection to your assessable income earning activities and are considered allowable deductions under section 8-1 of the ITAA 1997.

The subjects outlined in Group B do not have the necessary connection with your income earning activities. They are considered only very generally related to your activities and the knowledge and skills imparted by these subjects are well beyond the requirements of your current income earning activities. Therefore, the subjects listed in Group B are not allowable deductions under section 8-1 of the ITAA 1997.

Calculating your deduction

You incur an outgoing at the time you owe a present money debt that you cannot escape.

Paragraph 6 (a) of Taxation Ruling TR 97/7 states:

a taxpayer need not actually have paid any money to have incurred an outgoing provided the taxpayer is definitively committed in the year of income. Accordingly, a loss or outgoing may be incurred within section 8-1 even though it remains unpaid, provided the taxpayer is 'completely subjected' to the loss or outgoing. That is, subject to the principles set out below, it is not sufficient if the liability is merely contingent or no more than pending, threatened or expected, no matter how certain it is in the year of income that the loss or outgoing will be incurred in the future. It must be a presently existing liability to pay a pecuniary sum;

The census date for the fees of the allowable subjects would be the date you incurred the expense.

You cannot claim a tax deduction for repayments you make (whether compulsory or voluntary) on your FEE-HELP loan as per section 26-20 of the ITAA 1997.

The self-education expenses you can deduct may be subject to a reduction of up to $250 in accordance with section 82A of the Income Tax Assessment Act 1936. Paragraph 119 to 155 of TR 98/9 provides an explanation of how this provision operates. Also enter reference QC 61642 into the search function of www.ato.gov.au to help work out your claim.