Edited version of private advice

Authorisation Number: 1051876373264

Date of advice: 30 September 2021

Ruling

Subject: Work related expenses - self- education

Question 1

Are you entitled to a deduction for self-education expenses (remainder of the first-year tuition fees) incurred in undertaking MBA?

Answer

No

Question 2

Are you entitled to a deduction for self-education expenses (second year tuition fees) incurred in undertaking MBA?

Answer

No

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You were based in City A working in the construction industry across areas such as railway construction, bulk earthworks, community water systems, concrete structures, pavements, drainage and building services.

In your previous role, you provided the management and engineering control for major construction projects in Australia. These projects are often multi-disciplinary and require not only sound technical ability but also strong leadership and project management skills.

You were notified of your admittance to the MBA Class with a Business school.

You made an initial deposit to reserve your place in the program. You are funding the cost of the study without any government subsidy or employer reimbursement.

You have paid the remainder of the first year's fees.

The second year's tuition fees are due in after your course starts, you will make a payment in that year.

You have resigned from your employer.

There is no arrangement for re-employment with the employer upon graduation. The decision to enrol in the MBA program is wholly independent.

Your final day of employment was prior to the course start date, then you will begin as a full-time student, graduating in about 2 years.

You will leave Australia to undertake the study and plan to return to Australia upon completion.

Your current plan is to return to Australia and continue to work in a similar role, if not the same role, in the construction industry.

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.

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. TR 98/9 provides at paragraph 12 that self-education expenses are deductible under section 8-1 where they have a relevant connection to the taxpayer's current income-earning activities.

TR 98/9 explains further in paragraphs 48 - 62 that a deduction is not allowable for self-education expenses if the subject of self-education is designed to get employment, to obtain new employment or to open up a new income-earning activity:

48. The decision of the High Court in FC of T v. Maddalena 71 ATC 4161; (1971) 2 ATR 541 establishes the principle that no deduction is allowable for self-education expenses if the study is designed to enable a taxpayer to get employment or to obtain new employment. Such expenses are incurred at a point too soon to be regarded as incurred in gaining or producing assessable income.

49. The Federal Court in FC of T v. M I Roberts 92 ATC 4787; (1992) 24 ATR 479 applied the principle in Maddalena when it overturned an AAT decision allowing a mine manager a deduction for expenses associated with a Master of Business Administration degree. Mr Roberts was retrenched by his employer in Australia and then undertook an MBA course in the US for two years. On his return to Australia, he was re-employed as a mine manager by another company at a significantly increased salary when compared with his previous position.

50. The AAT had relied on Kropp to allow a deduction for his MBA studies, based on a finding that there was a sufficient connection between the expenses and the income derived on the taxpayer's return to Australia. In overturning the AAT decision, Cooper J considered that moneys were spent to obtain a new employment, albeit one in a better position and on higher wages, rather than in the course of employment and that Maddalena clearly applied.

51. In the course of his judgement, Cooper J considered the decision in Kropp where an accountant resigned from his employment with an Australian accounting firm to take up a two-year development appointment with an associated firm in Canada. Mr Kropp later returned to Australia and recommenced work with his old employer at an increased salary. Waddell J allowed a deduction for the cost of the taxpayer's air fare to Canada on the basis that there was a perceived connection between the expenditure and the gaining of increased income on Mr Kropp's return to Australia. Cooper J considered that 'the principles enunciated by the High Court in Maddalena were not applicable...' on the facts of Kropp.

52. Despite the view expressed by Cooper J, we regard the decision in Kropp as in error. The decision fails to recognise that, because of the break in employment, the expenses in issue were incurred at a point too soon to be regarded as incurred in gaining or producing income.

Application to your circumstances

In your case, you are going to study an MBA program, and you were employed in a relevant field.

Whilst it is acknowledged that undertaking this course would provide some benefit to you in your general employment, as you believe it will provide opportunities for greater responsibility, leadership, and financial remuneration while working as a Project Engineer.

You have resigned from your current employer prior to the commencement of the course. There is no arrangement for re-employment with them upon graduation. The decision to enrol in the MBA program is wholly independent.

It is the Commissioner's view that this course of study will provide you with the opportunity for greater remuneration in a new income earning activity or new employment after completing the studies.

However, the expenses are incurred at a point too soon to be regarded as incurred in gaining or producing assessable income. Therefore, you are not entitled to a deduction for self-education expenses (including the remainder of the tuition fees) incurred in undertaking the MBA.