Edited version of private advice

Authorisation Number: 1052240460199

Date of advice: 22 April 2024

Ruling

Subject: Self education expenses

Question 1

Are you entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 for the self-education expenses you incurred in studying your Master of Business Administration (MBA) while you were employed?

Answer

Yes.

Question 2

Are you entitled to a deduction under section 8-1 of the ITAA 1997for self-education expenses incurred in studying your MBA during the period of non-employment DD MM 20XX to DD MM 20XX?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

On or around Month 20XX, you enrolled to study a Senior Executive Master of Business Administration (MBA) at the relevant education institution. At this time, you were employed as a X Manager with Employer A as a member of the senior management team.

Your Key result areas and responsibilities were:

•         Health safety environment and Quality: to lead the company's health and safety activities, to ensure that all aspects are undertaken consistently and efficiently to ensure compliance with project, statutory and company requirements.

•         Senior Management: to provide leadership as an active member of the management team.

•         Human Resources (HR) Strategy: to develop communicate and implement HR strategy.

•         Culture: to identify risk, themes and opportunities for improvement including strategy development, leadership development, lean operational excellence.

•         Coaching and advising: to provide advice, support and coaching on a range of employment and industrial relations.

•         People management: to provide advice and direction to management regarding Human Resources practices, policies, procedure and issue resolution.

•         Technical advice and knowledge: including recruitment, remuneration, policies and procedures, reporting and compliance.

You had a corporate financial budget of $X and a community sponsorship budget of $X.

You had a number of direct reports. To obtain the position you were required to hold an undergraduate degree in Human Relations or a related discipline.

Prior to commencing the MBA, you had many discussions with your employer regarding the MBA study and your future upon completion, including additional responsibilities. You and your manager talked about the additional value it would bring to the role.

The modules and timetable for the MBA are provided below:

•         Module 1 | DD MM - DD MM 20XX Executive Management 1 ($X): Leadership & Change, Data Analysis, Marketing, Executive Skills Workshop/Seminar

•         Module 2 | DD MM - DD MM 20XX Executive Management 2 ($X ): Organisational Behaviour, Accounting I, Global Business Economics, Executive Skills Workshop/Seminar

•         Module 3 | DD MM - DD MM 20XX Executive Management 3 ($X): Economics of Strategy, Managerial Judgement, Finance I, Executive Skills Workshop/Seminar

•         Module 4 | DD - DD MM 20XX Executive Management 4 ($X): Accounting II, Ethical Leadership, Managing Human Capital, Executive Skills Workshop/Seminar

•         Module 5 | DD MM- DD MM 20XX Executive Management 5 ($X): Finance II, Operations Business Strategy, Executive Skills Workshop/Seminar

•         Module 6 | DD MM - DD MM 20XX Executive Management 6 ($X): Brand Management, Negotiations, Implementation of Strategy, Executive Skills Workshop/Seminar

•         Module 7 | DD MM- DD MM 20XX Industry Studies in Asia ($X): Strategy Consulting Project in Indonesia, Company Visits, Expert Guest Speakers. (Due to Covid-19 restrictions in place in Month 20XX, this travel was undertaken in Malaysia in MM 20XX)

•         Module 8 | DD - DD MM 20XX Industry Studies in Europe ($X): Residential at X, Innovation Studies, European Business Models, Company Visits

•         Module 9 | 16 - 24 July 20XX Industry Studies in America ($X): Residential at University of California - Berkeley, Leadership and Technology Studies, Silicon Valley Company Visits

•         Module 10 | DD MM - DD MM 20XX Executive Management 7 ($X): Mergers & Acquisitions, Leading at the Top in Transformational Times, Corporate Governance, Executive Skills Workshop/Seminar

As part of the MBA course, you were required to travel overseas and incurred travel expenses including the cost of international flights.

•         you travelled to Country X to complete "Industry Studies in XXX". Due to Covid-19 restrictions in place in MM 20XX, this travel was undertaken in Country X during MM 20XX.

•         you travelled to Country X to complete "Industry Studies in Country X".

•         you travelled to Country X to complete "Industry Studies in Country X".

You received a scholarship for $ X from the relevant education institution towards your study costs.

You paid an intake acceptance fee of $ X.

You paid the course fees through FEE HELP Higher Education Loan Program.

Neither of your employers have reimbursed you for the expenses you wish to claim a deduction.

You took annual leave when required while studying for the MBA course.

On DD MM 20XX, due to redundancy, your employment ceased with Employer A.

On DD MM 20XX, you commenced a new role as Chief Executive Officer (CEO) with Employer B on DD MM 20XX.

Your duties as CEO includes:

•         Reporting directly to the Board

•         Leading Senior Leadership Teamand overall responsibility for X staff and over X clients

•         Managing Budget of $X million and Board management

•         Re-branding/Marketing and Media

•         Stakeholder Management including Members of Parliament, multiple government agencies.

•         Responsible for new business and strategy.

You completed the MBA course in MM 20XX.

Neither of your employers have reimbursed you for the expenses you wish to claim a deduction.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Reasons for decision

Detailed reasoning

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 the course of gaining or producing the assessable income but are not allowable to the extent that they are of a capital, private or domestic nature.

A number of significant court decisions have determined that, for an expense to satisfy the tests outlined in section 8-1 of the ITAA 1997:

•         it must have the essential character of an outgoing incurred in gaining assessable income or, in other words of an income-producing expense (Lunney v FC of T (1958) 100 CLR 478);

•         there must be a connection between the outgoing and the assessable income so that the outgoing is incidental and relevant to the gaining of assessable income (Ronpibon Tin NL v FC of T (1949) 78 CLR 47)

•         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 (Charles Moore & Co (WA) Pty Ltd v FC of T (1956) 95 CLR 344; FC of T v Hatchett 71 ATC 4184).

Redundancy issue

In Thomas v FC of T (2015) ATC10-404, [2015] AATA 687 (Thomas's case), the taxpayer was an associate director at National Australia Bank (NAB). During that time, he decided to undertake further study on a full-time basis, of which NAB was generally supportive. The taxpayer applied for and was accepted into a MBA course at Ecole des Hautes Etudes Commerciales de Paris. A payment agreement was signed by the taxpayer, with his father as guarantor. The agreement stated that it was a commitment to pay the course fees in three instalments, the first of which was non-refundable. Just after the taxpayer had paid for his flights, visa and the first instalment of fees he was made redundant by NAB. The Commissioner accepted that the expenses for the flights and the visa were incurred when they were paid, prior to the taxpayer being unemployed, and an allowable deduction. However, the AAT held that the taxpayer had not incurred the second and third instalments while employed as the commitment to pay was not definite. Only the first instalment of fees was an allowable deduction as it was the only amount deemed non-refundable and incurred in the period of producing assessable income.

The principle arising from this case is that where the self-education expense is incurred during a period of relevant related employment, the expense is deductible. 'Incurred' covers both the situation where payment is actually made and where a commitment to pay is definite, although payment itself may not occur during the relevant employment.

This is to be contrasted where the outgoings are no more than 'impending, threatened or expected', in which case they are not deductible (New Zealand Flax Investments Pty Ltd v FC of T [1938] HCA 60)

Course Fees

Self-education expenses incurred to attend a work-related conference, seminar or a place of education, subject to paragraphs 98 to 101 of Taxation Ruling 2024/3 Income tax: deductibility of self-education expenses incurred by an individual (TR 2024/3), are deductible. This includes fees such as student union fees, student services and amenities fees charged by the place of education. These are incurred in undertaking the study and are not private or domestic in nature.

Course fees to attend a university or approved higher education provider are deductible only where you are enrolled in a full fee-paying place (where the government does not pay any part of your fees).

You cannot claim a deduction for course fees in respect of a Commonwealth supported place (CSP). A CSP is a type of enrolment where the total cost of your study is split into 2 parts:

•         Subsidised amount - the Australian Government pays a subsidy directly to your education provider. This is not a loan and you do not pay it back. You cannot claim a deduction for the subsidised amount.

•         Student contribution amount - you pay the amount remaining, being the student contribution amount which you must pay by the census date either upfront or using a HECS-HELP loan, if you are eligible. HECS-HELP loans are repaid through the tax system once your income is above a certain threshold. You cannot claim a deduction for the student contribution amount you pay (either upfront or by way of a HECS-HELP loan)

If you use borrowed money to pay for course fees, this will not affect the deductibility of those fees or when you can claim a deduction. However, you cannot claim a deduction for repaying the principal amount borrowed.

FEE HELP

For example, a full fee-paying student using a FEE-HELP loan or a personal loan can claim a deduction for their course fees (where they are deductible) at the time they pay those fees using the borrowed money. They cannot claim a deduction for repaying the loan, either as part of their income tax assessment or as voluntary repayments.

For fees incurred via FEE HELP debt, the effective date (which is the due date) is used to determine which year you can claim the deduction. This is the date at which you cannot withdraw from the study without incurring the expense, often referred to as the "census date".

Airfares

Paragraph 126 of TR 2024/3 provides that airfares incurred on overseas study tours or sabbatical, on work related conferences or seminars or attending an educational institution are deductible under section 8-1 of the ITAA 1997. They are considered part of the necessary costs of participating in the tour or attending the conference or seminar or the educational institution.

Application to your circumstances

At the time you enrolled in the MBA course you were employed by Employer A in the role of X Manager. It is accepted that the MBA course of study would enhance your existing skills and knowledge as required in that position and the course would have likely led to an increase in your assessable income. This satisfies the test of the expense being connected to your assessable income at the time.

However, during the course of your MBA study, you were made redundant from Employer A. As a consequence of the redundancy, between DD MM 20XX to DD MM 20XX, you did not receive assessable income that could be linked to the self-education expense. Therefore, the necessary connection between expenses incurred during this period of non-employment and your income earning activities does not exist. However, as discussed above, course fees paid prior to being made redundant are considered to be deductible in line with Thomas's case.

You subsequently commenced employment with Employer B in the role of Chief Executive Officer on DD MM 20XX. In this role, it is also accepted that the MBA course of study would enhance your existing skills and knowledge as required in this position.

Therefore, having considered your circumstances and the relevant factors, the Commissioner is satisfied there is an identifiable nexus or connection between the MBA course and your employment in both roles. As discussed above, for fees payable on your HELP debt, you use the effective date (which is the due date) to determine which year you can claim the deduction. Consequently, your self-education expenses incurred during your periods of employment are deductible under section 8-1 of the ITAA 1997. However, you cannot claim a deduction for expenses incurred during the period of non-employment (DD MM 20XX to DD MM 20XX).