Edited version of private advice

Authorisation Number: 1052148104885

Date of advice:8 August 2023

Ruling

Subject: Self-education expenses

Question:

Are you able to claim a deduction for your expenses for your course?

Answer

No.

This ruling applies for the following period:

Period Ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You carry on a business activity which you commenced at a specified date during the ruling period.

You worked as Occupation A until you commenced your course.

In order to join the State A Bar, you undertook an entrance exam and training course.

Your tax agent advised the following contentions:

•                     You understood that the expenses are not deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) as they are considered to be a point too soon.

•                     You consider that the expense was incurred directly as an establishment cost.

•                     You consider that the expenses are similar shop establishment expenses where they are claimable as an expense.

Relevant legislative provisions

Income tax Assessment Act 1997 section 8-1

Income tax Assessment Act 1997 section 40-880

Income Tax Assessment Act 1997 subsection 40-880(2)

Income Tax Assessment Act 1997 paragraph 40-880(2)(a)

Income Tax Assessment Act 1997 subsection 40-880(3)

Income Tax Assessment Act 1997 subsection 40-880(4)

Income tax Assessment Act 1997 Division 43

Income Tax Assessment Act 1997 section 43-10

Income Tax Assessment Act 1997 subsection 43-10(1)

Income Tax Assessment Act 1997 subsection 43-10(2)

Income Tax Assessment Act 1997 section 84-5

Income Tax Assessment Act 1997 Division 85

Income Tax Assessment Act 1997 subsection 85-10(2)

Income Tax Assessment Act 1997 Division 87-A

Income Tax Assessment Act 1997 Part 2-42

Reasons for decision

General deductions

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

Although expenses related to improving knowledge or skills are not capital in nature, TR 98/9 Income tax: deductibility of self-education expenses incurred by an employee or a person in business (TR 98/9) states that no deduction is allowable under section 8-1 for self-education expenses if the study is to enable a taxpayer to get employment, to obtain new employment or to commence a new income-earning activity (whether in business or in the taxpayer's current employment). This includes studies relating to a particular profession, occupation or field of employment in which the taxpayer is not yet engaged. In other words, a taxpayer may only be allowed a deduction for self-education expenses if they incur in relation to their current income-earning activity to maintain or improve that skill or knowledge. The expenses are incurred at a point too soon to be regarded as incurred in gaining or producing assessable income

Blackhole expenditure

Section 40-880 allows certain business expenditure to be deducted in equal proportions over five income years where the requirements of the provision are met. Subsection 40-880(2) sets out the requirements for entitlement to the deduction whilst subsections 40-880(3) and 40-880(4) set out limitations.

To loosely summarise the conditions, the expenditure must:

•                     be capital expenditure: subsection 40-880(2)

•                     be 'in relation to' your business: paragraph 40-880(2)(a)

TR 98/9 at paragraph 47 states that expenses related to improving knowledge or skills are not of a capital nature.

As the fees that you paid for your course are not capital in nature and section 40-880 only applies to capital expenditure, a deduction is not allowable under that provision for the cost of the course.

Capital works expenditure

Section 43-10 of the ITAA 1997 allows initial establishment cost deductions which is limited to capital works. You can deduct an amount for capital works for an income year: subsection 43-10(1). Under subsection 43-10(2), you can only deduct the amount if:

(a) the capital works have a construction expenditure area;

(b) there is a pool of construction expenditure for that area; and

(c) you use your area in the income year in the way set out in Table 43-140 (Current year use).

Your expense for the course is not an initial establishment cost as it is not a capital works expenses, therefore a deduction for your course is not an allowable deduction under section 43-10 of the ITAA 1997.

Deductions relating to Personal Services Income (PSI)

Section 84-5 of the ITAA 1997 defines the personal services income of an individual as being income which is mainly a reward for that person's personal efforts or skills.

Division 85 of the ITAA 1997 sets out that deduction that an individual cannot claim in relation to his or her personal income. Generally, an individual will be entitled to claim only those deductions that would be available to them as an employee. The deductions are generally limited to those allowable to employees under the general deduction provisions of the ITAA 1997, particularly the rules in section 8-1.

However, there are other work-related deductions that are specifically allowable to an individual who gains or produces personal services income, as set out in subsection 85-10(2):

•                     the expenses of gaining work

•                     insuring against loss of income or income earning capacity

•                     insuring against liability arising from acts or omissions in the course of earning income

•                     engaging a person or business, not being an associate of the individual, to perform work

•                     engaging an associate to perform work that forms part of the principal work that produces your personal services income

•                     contributing to superannuation fund for the superannuation benefit of the individual or the individual's SIS dependants in the event of the individual's death

•                     payment of premiums, contributions or similar payments under workers compensation law payments made to an employee for compensable work-related trauma, or

•                     meeting obligations or exercising rights under the GST law.

You stated the expenses in completing the course was incurred directly as an establishment cost to your personal services business. It should be noted that you will only be considered as conducting a personal services business if one of the four personal services business tests under section 87-A of the ITAA 1997 is met in the income year.

You have incurred the expenses for the course in a specified month. You claimed you have established your business activity a few months after you commenced your course. These expenses were incurred prior to gaining or producing your personal services income for your business activity; therefore these expenses are not allowable deductions. As the expenses have no nexus to the earning of your personal services income, the PSI rules in Part 2-42 of the ITAA 1997 will not apply.

Conclusion

It is acknowledged that you had previously worked as Occupation A, which you ceased working at prior to the commencement of your course. You commenced your business activity on completion of the course. This opened up a new income earning activity and you are no longer working as Occupation A. Although the knowledge gained from the course may be useful for a person working as Occupation A, you did not incur the course expenditure to assist you in your then current income-earning activity as Occupation A before starting the course. Therefore, you would not be allowed a deduction under 8-1 of the ITAA 1997.

The course expenses related to improving knowledge or skills are not capital in nature. Therefore, section 40-880 or Division 43 would not apply as both only applies to capital expenditure. Therefore, you are not entitled to a deduction for the expenses incurred for the course.