Edited version of private advice

Authorisation Number: 1052053704491

Date of advice: 2 November 2022

Ruling

Subject: Work related self-education expenses

Question

Can you claim a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for self-education expenses which you incurred in studying a Master of Business Administration (MBA)?

Answer

No. Where you seek to claim the money that you had to repay under the terms of the scholarship with your former employer, this is not deductible. However, course fees that were not covered by the scholarship will be deductible under section 8-1 of the ITAA 1997.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

From 20XX - 20XX you were employed as an Information Technology professional for Employer A.

This role required significant technical expertise and involved management responsibilities.

You oversaw a team of X staff in this role.

You also undertook periods of higher duties stepping into your managers' roles for significant periods of time. Over this time you managed X team leaders with X reports.

You decided to undertake a Masters of Business Administration (MBA) while employed in this role.

You were awarded a study scholarship from Employer A in to undertake an MBA.

Employer A's study scholarship provided the full cost of tuition fees, but the terms of the scholarship contained a claw-back provision whereby you would be required to repay the full amount if you did not remain with the organisation for a minimum period of time after completing the degree.

You began the MBA through an approved tertiary education institution, then transferred to another approved tertiary education institution to complete the MBA online.

While undertaking the MBA you accepted an employment offer from a Employer B as an Information Technology (IT) Service Delivery Manager.

This position required significant technical and management expertise and experience.

You were required to repay the full amount of the Employer A scholarship due to leaving Employer A within the period covered by the claw-back provision.

You continued studying and completed the MBA.

The course fees for all units apart from the 2 final units were initially reimbursed by the Employer A under the terms of their scholarship award.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1936 section 51AH

Reasons for decision

Section 8-1 of the ITAA 1997 allows a deduction for all losses or outgoings to the extent to which they are incurred in gaining or producing assessable income, except to the extent that they are outgoings of a capital, private or domestic nature.

The courts have considered the meaning of 'incurred in gaining or producing assessable income'. In Ronpibon Tin NL & Tongkah Compound NL v. Federal Commissioner of Taxation (1949) 78 CLR 47; [1949] HCA 15; (1949) 4 AITR 236; (1949) 8 ATD 431 the High Court stated that:

'For expenditure to form an allowable deduction as an outgoing incurred in gaining or producing assessable income it must be incidental and relevant to that end. The words "incurred in gaining or producing assessable income" mean in the course of gaining or producing such income.'

The expenditure must therefore be related to the production of assessable income.

The Australian Taxation Office Interpretative Decision ATO ID 2002/902Income Tax - Deductibility of damages paid for breach of employment contract - repayment of self education expenses explains that payments for damages (being repayment of self-education expenses) to the employer by the taxpayer due to breaching the terms of a sponsorship agreement are not related to the earning of assessable income. These payments represent expenditure incurred by the taxpayer for breaching the terms of the employment contract. Therefore, this type of expenditure for damages cannot be said to have been incurred as a self-education expense.

Section 51AH of the Income Tax Assessment Act 1936 (ITAA 1936)confirms that deductions are not allowable where expenses incurred by an employee are reimbursed by their employer. Therefore, even where a course fee is initially paid by the taxpayer, the reimbursement of this cost by their employer prevents the expense from being deductible.

Application to your circumstances

The course of study you have undertaken has enhanced skills that are required to perform the responsibilities and duties of your employment with Employer A and Employer B. Therefore, the self-education expenses incurred in undertaking the course have sufficient connection or nexus with the earning of your assessable income under section 8-1 of the ITAA 1997.

However, any course fees which were paid for or reimbursed by Employer A under its scholarship awarded to you and which you subsequently repaid to them represent damages paid for breach of employment contract. The occasion of the expenditure arises from leaving your employment rather than the study itself. Even though it can ultimately be traced back to the course fees, there is no direct nexus with the study. These expenses are not deductible under section 8-1 of the ITAA 1997.

Course fees that were not covered by the scholarship will be deductible under section 8-1 of the ITAA 1997.