Edited version of private advice

Authorisation Number: 1051759105813

Date of advice: 9 October 2020

Ruling

Subject: Self-education expenses

Question

Are you entitled to a deduction for self-education expenses incurred in completing a Professional Legal Training program?

Answer

No.

This ruling applies for the following period

Year ended 30 June 20XX

The scheme commenced on

1 July 20XX

Relevant facts and circumstances

You are employed as a lecturer.

You are currently lecturing legal subjects.

You are a graduate in law.

You enrolled in a course designed to enable admission to practice as a lawyer.

You paid expenses to enrol in the course.

To undertake the course you must be a graduate in law, have qualified to graduate in law, or have undertaken all academic requirements other than practical training, prescribed for admission as a lawyer.

Your employer will reimburse you a percentage of the course costs upon completion and is providing you with X hours of study time for the duration of the course.

On completion of the course you will be entitled to:

·         a certificate of completion

·         a Graduate Diploma of Legal Practice, and

·         may be admitted to legal practice by the relevant Supreme Court if you satisfy all the court's other formal requirements for admission.

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, or relate to the earning of exempt income, or a provision of the ITAA 1997 prevents it.

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

·         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, 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.

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).

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.

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 (FC of T v. Maddalena (1971) 45 ALJR 426; (1971) 2 ATR 541; 71 ATC 4161(Maddalena)).

To determine whether your self-education expenses are deductible, the essential character of the expenditure must be considered. It is necessary to determine whether there is a sufficient nexus between the expenditure and your current income-earning activities.

In Case R60, 84 ATC 447 the Board of Review disallowed self-education expenses. The taxpayer was a public servant and their position required relevant experience or some legal training (which the taxpayer already had) but not legal qualifications as such. In the circumstances, the continuation of the taxpayer's legal studies could not be characterised as a relevant incident of or as part and parcel of his employment. While the legal studies were specified as an advantage for the position held by the taxpayer and the taxpayer's legal training was relied on by the branch he was in, if the studies were discontinued, the branch would not have reacted at all. The branch head saw the encouragement given to the taxpayer as part and parcel of normal staff development.

In Case Z1 92 ATC 101; AAT Case 7541 (1992) 22 ATR 3549, the applicant, a public service clerk who completed a six month course at the college of law, claimed a deduction for expenses that led to her admission as a solicitor. The Tribunal held the admission fees were of a capital nature and were, therefore, not an allowable deduction. The admission expenses secured the applicant a 'lasting advantage'. They also secured her the status of a solicitor that was considered a 'profit yielding subject' (Sun Newspapers Ltd and Associated Newspapers Ltd v. FC of T (1938) 61 CLR 337; 5 ATD 23; [1939] ALR 10). In applying Maddalena, the Tribunal held that the admission expenses were also incurred in getting, not in doing, work as an employee. They came at a point too soon to be properly regarded as incurred in gaining assessable income.

Even though the course may broaden your knowledge and make you a better employee and better able to carry out your duties, as with the cases quoted above, the courts have held that this is not sufficient to enable expenditure to be allowed as a deduction.

You have previously completed a Bachelor of Laws, a qualification and level of knowledge that is appropriate to enable you to work as a lecturer. While the course may help you with your work it is a specialised program which is designed to enable admission to practice as a lawyer giving you knowledge and qualifications well in excess of what is required to carry out your duties.

While you may need to maintain currency by participating in industry release you are not required to have the requisite training or qualifications to be admitted as a lawyer in order to do so. It is considered that there is an insufficient connection between the skills and knowledge required in your employment and the course. The costs of completing the course are not incurred in earning your assessable income and therefore you are not entitled to a deduction for these expenses under section 8-1 of the ITAA 1997.