Edited version of private advice

Authorisation Number: 1052090462141

Date of advice: 24 February 2023

Ruling

Subject: Deductions

Question

Are the education fees (the MBA fees) relating to the Individual A undertaking a Master of Business Administration (the MBA), which have been incurred by Trust A, deductible?

Answer

No

Question 2

Are the travel expenses relating to Individual A undertaking part of their MBA in the United States of America (USA) which have been incurred by Trust A, deductible?

Answer

No

This ruling applies for the following periods:

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

Trust A is a discretionary trust created by deed.

Individual A is a beneficiary of Trust A.

Individual A is the appointor of Trust A.

Company A is the trustee of Trust A.

Individual A is the sole director, secretary and sole shareholder of Company A.

Individual A has complete control over Company A and Trust A.

Trust A has operated a small retail business for several decades.

Individual A sells items for the retail arm of the business and acts for the business as a consultant and agent and Trust A takes a commission.

Around X years ago the business ceased to be physical and moved online.

For the 20XX-XX, 20XX-XX, 20XX-XX income years:

•         Trust A received income on less than $XX generating a small profit in X out of the X years.

•         Trust A's income was predominantly derived from leasing a commercial property.

Trust A engages a rental manager to manage the renting of the commercial property, however Individual A undertakes some duties in respect of renting the property.

Individual A has completed an MBA with a particular focus on technology to up skill themself.

The subjects completed in the MBA include:

•         Managing people and organisations.

•         Silicon Valley study tour.

•         Digital strategy.

•         Strategic consulting project.

Trust A has met the MBA fees on behalf of Individual A.

The MBA fees and related expenditure have been incurred by Trust A in the income years ending 30 June 20XX, 30 June 20XX, and 30 June 20XX.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Reasons for decision

Summary

On consideration of the facts and circumstances it is our view that the expenditure on the MBA fees or related travel expenses for Individual A does not have the essential character of an outgoing incurred in earning the Trust A's income. Nor is the expenditure considered to have been necessarily incurred in carrying on the trust's business. Trust A is not entitled to deduction for the MBA fees or related travel expenses.

Detailed reasoning

Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income or is necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income, except where the outgoings are of a capital, private or domestic nature, a provision of the tax law prevents it.

The phrase 'necessarily incurred' does not mean that the expense was unavoidable or logically necessary. The expense must be clearly and appropriately adapted for the ends of the business.

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).

Where the expense is voluntary, the controlling factor is whether the expense can objectively be seen to be appropriate to the business activity (Magna Alloys & Research v. FC of T 80 ATC 4542; (1980) 11 ATR 276).

Taxation Ruling TR 95/33 Income tax: subsection 51(1) - relevance of subjective purpose, motive or intention in determining the deductibility of losses and outgoings) discusses the relevance of the subjective purpose, motive or intention in determining the deductibility of an expense. The ruling states that an expense will generally be deductible if its essential character is that of expenditure sufficiently connected with the operations or activities which more directly gain or produce your assessable income.

The essential character of an expense is a question of fact to be determined by reference to all the circumstances including an examination of the taxpayer's subjective purpose, motive or intention in making the outgoing where there is not a strong commercial rational for an outgoing.

Application to your circumstances

The following contentions have been made in the private ruling application:

•         Individual A intends to expand and increase the income producing activities of Trust A.

•         Such expansion or increase may include:

o   the repurposing or development of its commercial property

o   increasing Trust A's rental activities

o   up scaling up of the consultancy or retail activities

o   a physical presence of the retail facility.

•         To facilitate the expansion and increasing of Trust A's income producing activities, Individual A has completed an MBA to up skill themselves.

•         Individual A's aim was to enhance their skills in key areas that will assist in expanding the consultancy and retail business which will encompass a greater on-line presence, and the use of social media.

Individual A currently provides their services to Trust A as a consultant, retail outlet and undertakes some duties in respect of the commercial property. Trust A's predominant source of income is one of passive income from renting out its commercial property.

On consideration of the facts and circumstances, the contentions that Individual A's MBA was undertaken for expanding and improving the income producing activities of Trust A are considered too remote to have the required connection to Trust A's current business or passive income producing activities.

Individual A stands to personally benefit from the MBA, a benefit considered as private in nature from the perspective of Trust A. In consideration of its subjective purpose our view is that Trust A incurred the expenditure for Individual A as they were its beneficiary and controller. We consider it unlikely that the expenses would have been incurred if Individual A was an employee who was otherwise unconnected to Trust A.

On review of the educational outcomes of the MBA course, Individual A's role with Trust A and the income earning activities of the trust, our view is that the expenditure does not have the essential character of an outgoing incurred in earning the trust's income. Nor is it considered to be necessarily incurred in carrying on the trust's business. Trust A is not entitled to deduction for the MBA fees or related travel expenses.