Edited version of private advice

Authorisation number:1052241916261

Date of advice: 30 April 2024

Ruling

Subject: Income deductions - self education allowances.

This ruling applies for the following periods:

Year ended XX XXXX 20YY

Year ended XX XXXX 20YY

The scheme commenced on:

XX XXXX 20YY

Relevant facts and circumstances

On XX XXX XXXX, you started working as a Manager within a division of Company A.

Your role and responsibilities at Company A as stated in your Statement of Service confirmed that you had management and leadership responsibilities as key duties of your position.

You enrolled in a Master of Business Administration course (MBA) while employed at Company A.

You took unpaid leave to complete the MBA course.

On XX XXX XXXX, you made the first of three payments for the MBA course.

On XX XXX XXXX, a letter from Company A confirmed the career break application for one year from XX XXX XXXX to XX XXX XXXX made by you.

The MBA course had two perquisites before you were able to enrol.

The first perquisite was, prior to completing the MBA, fluency in a language other than your primary language.

You were fluent in two languages before commencing the course.

The second perquisite was at the end of the MBA, proficiency in a third language.

On XX XXX XXXX, you took a flight from Country A to Country B.

On XX XXX XXXX, you took a flight from Country B to Country C.

The trip from Country A to Country C cost $XX.

On XX XXX XXXX, you travelled from Location A in Country C to Location B in Country C.

From XX XXX XXXX to XX XXX XXXX, you rented accommodation in Location B.

On XX XXX XXXX, you started a language course in a third language at Education Provider A.

The language course cost $XX.

The language course is designed to allow the participate to certify their level with an official certificate of that language.

The certificate is valid for both undergraduates and postgraduates.

You completed the following subjects for your language course:

•         Reading Comprehension.

•         Listening Comprehension.

•         Written Expression and Interaction.

•         Spoken Expression and Interaction.

On XX XXX XXXX, you completed the exam for the language course, which cost $XX.

On XX XXX XXXX, you completed the language course.

On XX XXX XXXX, you took a flight from Country C to Country D, which cost $XX.

From XX XXX XXXX to XX XXX XXXX, between completing the language course and starting the MBA you took the time to have a holiday.

On XX XXX XXXX, you made the second of three payments for the MBA course.

From XX XXX XXXX to XX XXX XXXX, you resided in Country D in two accommodations which you rented under residential tenancy contracts.

You rented the first accommodation in Country D which was a private room from XX XXX XXXX to XX XXX XXXX for a cost of $XX.

You rented the second accommodation in Country D which was student from XX XXX XXXX to XX XXX XXXX for a cost of $XX.

You retained your Australian residence for the entire duration you were completing the MBA course overseas.

On XX XXX XXXX, you started the MBA course.

The MBA course required you to travel to Country E for a study tour.

On XX XXX XXXX, you made the third and last payment for the MBA course

On XX XXX XXXX, you took a flight from Country D to Country E, which cost $XX.

From XX XXX XXXX to XX XXX XXXX, you rented accommodation in Country E, which cost $XX.

Between XX XXX XXXX to XX XXX XXXX, you were completing the course.

Between XX XXX XXXX to XX XXX XXXX, you had private leisure time in Country E.

Between XX XXX XXXX to XX XXX XXXX, you made a private trip to a location in Country E.

On XX XXX XXXX, you took a flight from Country E to Country D, which cost $XX.

On XX XXX XXXX, you were offered a job at Company B.

On XX XXX XXXX, you accepted the beforementioned job from Company B.

Your job with Company B will commence XX XXX XXXX.

In a letter dated XX XXX XXXX, Company A confirmed you were employed in a permanent full-time capacity as Manager within the Operations Advisory group of Company A's Managing Consulting division.

On XX XXX XXXX, you completed the MBA course.

The total cost for the MBA course was $XX.

On XX XXX XXXX, you received the degree of Master of Business Administration.

On XX XXX XXXX, you resigned from Company A.

You took a temporary role as an analyst with Company C until you would be able to start at Company B.

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.

The High Court majority in Commissioner of Taxation v Payne [2001] HCA 3 said it is well established that these words are to be understood as meaning incurred 'in the course of' gaining or producing assessable income, and do not convey the meaning of outgoings incurred 'in connection with' or 'for the purpose' of deriving assessable income.

The majority further stated that the meaning of 'in the course of' gaining or producing income was amplified in Ronpibon Tin NL v Commissioner of Taxation (Cth) [1949] HCA 15 where it was held that:

... to come within the initial part of [section 8-1] it is both sufficient and necessary that the occasion of the loss or outgoing should be found in whatever is productive of the assessable income, or if none be produced, would be expected to produce assessable income...

Taxation Ruling 2020/1 sets out when an employee can deduct a work expense under section 8-1 of the Income Tax Assessment Act 1997. For the purposes of this Ruling, 'work expense' means 'a loss or outgoing you incur in producing your salary or wages'.

For the expense to be deductible it but be in gaining or producing assessable income. Paragraphs 16, 22, 23 and 25 of the TR 2020/1 state:

16. For expenses incurred by employees, the fundamental question is whether an expense is incurred in the course of earning employment income. This involves considering the proper scope of the particular taxpayer's work activities to determine if the circumstances of the expense have a sufficiently close connection to earning the employment income.

22. The requirement that expenses be incurred in the course of producing assessable income means that it is not enough to show only that there is some general link or causal connection between expenditure and the production of income. The expenditure must have a sufficiently close connection to performance of the employment duties and activities through which the employee earns income.

23. Accordingly, in some cases, expenditure would be regarded as too remote from the income-earning activities or incurred only as a prerequisite to earning income, and not incurred in the course of producing that income.

25. Other examples of expenditure that would be too remote from the income-earning activity, or incurred at a point too soon to be characterised as incurred in the course of earning assessable income, would be expenses of looking for and securing new employment. This would also be the case for relocation expenses to work in a different city or state. Similarly, education expenses to obtain qualifications for new employment would not be incurred in the course of gaining or producing relevant assessable income.

A deduction cannot be claimed if it is for private or domestic purposes. Paragraph 47 of TR 2020/1 states:

47. Although the separate presence of a private test within section 8-1 implies that expenditure of this nature could otherwise qualify as a deduction under the positive test, it has been observed that it is a 'rare case where an outgoing incurred in gaining assessable income is also an outgoing of a private nature'. Characterisation of an expense as private typically supports a conclusion that the expense does not have a sufficiently close connection to the earning of assessable income by the employee.

Taxation Ruling TR 2024/3 discusses the circumstances under which self-education expenses are allowable as a deduction. A deduction is allowable for self-education expenses if a taxpayer's current income earning activities are based on the exercise of a skill or some specific knowledge, and the subject of the self-education enables the taxpayer to maintain or improve that skill or knowledge (Federal Commissioner of Taxation v. Finn (1961) 106 CLR 60, (1961) 12 ATD 348).

Paragraphs 13 to 16 and 19 of the TR 2024/3 state:

13. To be deductible under section 8-1, expenditure must be able to be characterised as having been incurred in gaining or producing assessable income.

14. It is well established that the words 'in gaining or producing assessable income' are to be understood to mean 'in the course of' gaining or producing assessable income and do not convey the meaning of outgoings incurred 'in connection with' or 'for the purpose' of deriving assessable income.

15. This means there must be a relationship, or close connection, between the expenditure and what it is that you do to produce your assessable income, or if none is produced, would be expected to produce your assessable income.

16. It is not enough to show only that there is some perceived connection, general link or causal connection between the expenditure and the production of your income. The expenditure must have a close connection to the performance of the duties and activities through which you earn your income.

19. Having the support or encouragement of your employer to undertake the self-education also is not, by itself, determinative of whether the expense is deductible.

Under paragraph 22, Self-education expenses are incurred in gaining or producing your assessable income if either or both of the following apply:

Your income-earning activities are based on the exercise of a skill or some specific knowledge and the self-education enables you to maintain or improve that skill or knowledge. (Principle 1)

The self-education objectively leads to, or is likely to lead to, an increase in your income from your current income-earning activities in the future. (Principle 2)

Paragraph 23, lists exclusions where Self-education expenses are not incurred in gaining or producing your assessable income if either of the following apply:

The self-education will enable you to get employment, to obtain new employment or to open up a new income-earning activity (whether in business or in your current employment). This includes studies relating to a particular profession, occupation or field of employment in which you are not yet engaged. These expenses are incurred at a point too soon to be regarded as incurred in gaining or producing your assessable income. (Exclusion 1)

You are not undertaking income-earning activities to derive assessable income at the time you incurred the expenses. These expenses are not connected to any income-earning activity at the time they are incurred. (Exclusion 2)

Paragraphs 81 to 85 discuss apportioning expenses if only part of the deductible is incurred in gaining or producing assessable income.

81. The use of the phrase 'to the extent' in section 8-1 means that there are circumstances where expenses may be deductible only in part if incurred in gaining or producing assessable income as well as for some other use, object or purpose. In these circumstances, it is appropriate to apportion expenses incurred between income-earning and other uses.

82. It is the objective relationship between your expense and your income-earning activities which usually determines whether the expense is incurred in gaining or producing assessable income. In most cases the reason for the expense will be apparent and it will not be necessary to enquire further. However, for expenses voluntarily incurred, which self-education expenses often are, your subjective purpose or motive for incurring the expense may be a relevant factor in determining what the expense is for.

83. For self-education expenses, you apportion the expenses as follows:

•         Where the self-education expense has distinct and severable parts, and some are for an income-producing purpose and others are for some other purpose, you apportion the expense according to its particular purpose.

•         Where the self-education expense is a single outlay that serves both an income-earning purpose and some other purpose, you apportion the expense on a fair and reasonable basis. What is fair and reasonable depends on your particular facts and circumstances.

84. Without limiting the application of paragraph 83 of this Ruling, where a course, when considered in its entirety, is not deductible under section 8-1 but particular subjects, classes or modules within the course are sufficiently connected to your income-earning activities, you apportion the expenses by claiming a deduction only for the expenses relating to those particular subjects, classes or modules that are deductible.

85. If there is an incidental purpose, you apportion the expenses as follows:

•         If the purpose of self-education is the gaining or producing of assessable income, the existence of an incidental private purpose does not affect the characterisation of the self-education expense as wholly incurred in gaining assessable income.

•         If you are on a holiday or attending an event for private purposes and the self-education was merely incidental to the private purpose, only those expenses directly attributable to the self-education (provided they are incurred in gaining or producing your assessable income) are allowable.

Paragraph 125 discusses the deductibility of airfares.

125. Airfares incurred to participate in self-education, provided you are not living at the location of the self-education activity, are deductible. Airfares are part of the cost of undertaking the self-education activities.

Paragraphs 128, 130, 131 and 132 discusses the deductibility of accommodation and meals.

128. If you are away from home overnight for self-education connected with your income-earning activities, the accommodation and meal expenses you incur are deductible. They are part of the cost of participating in the self-education. The self-education expenditure is not of a private nature because its occasion is your travel away from home on income-earning activities.

130. Similarly, accommodation and meal expenses you incur in connection with self-education will be private and domestic living expenses where you are living at the location of the self-education activity. This will apply regardless of whether the self-education allows you to acquire and improve the skills and knowledge you require to carry out your income-earning activities or leads to, or is likely to lead to, an increase in income from your income-earning activities.

131. The following factors indicate when your accommodation and meal expenses are private and domestic living expenses, and are not deductible:

•         The length of the overall period you will be away from your usual residence is a relatively long one.

•         The nature of the accommodation is such that it becomes your usual residence.

•         You are, or can be, accompanied by family or friends or visited by family or friends.

132. No single factor is decisive and the weight given to each of these factors will vary depending on your individual circumstances.

Application to your circumstances

To determine whether circumstances exist that support your self-education deductions, it is necessary to determine whether there is a sufficient connection between you incurring your expenses and your income earning activities at the time of commencing the courses. Whether such a connection exists is a question of fact and is to be determined by reference to all the facts in your case.

Question 1 - Language course

The expenses associated with completing the language course are private in nature and are not deductible. This is because the Commissioner is not satisfied that your study of the language course has the relevant connection to your income earning activities. There is only a general link between completing this course and your employment. Your role with Company A does not requirement you to speak the language, therefore this is your choice to complete this course and it is a private expense.

Question 2 - MBA course costs

You were employed as a Manager at Company A over the duration of your MBA course. The position description of your role confirms that the MBA has a clear connection to your income producing activities. Furthermore, you remained employed by Company A for the entire time you incurred MBA course fees.

As such, the course fees incurred to undertake the MBA will be deductible in the year in which the expenses were incurred.

Question 3 - MBA accommodation in Country D

You flew into Country D on XX XXX XXXX and rented accommodation until XX XXX XXXX. You rented a private room for part of the duration of the course, then moved into student accommodation for the remainder of the course; all the while retaining your Australian residence. The length of the overall period you stayed in Country D was a relatively long one and the nature of the accommodation is such that it became your usually residence. Therefore, accommodation expenses incurred in Country D over the duration you were completing the MBA course are not deductible under section 8-1 of the ITAA 1997.

Question 4 - MBA airfares from Country C to Country D

Airfares are deductible when the expense is incurred to participate in a course of self-education which is related to your income producing activities. However, if you move to a new place to live while undertaking a course of self-education, the nature of the airfares becomes private and personal as the nexus between the airfare and your earning of assessable income is severed.

In your case, you lived in Country D as your usual place of residence while completing your MBA. As the nature of this is private and domestic, expenses you incurred on airfares to move to Country D are accordingly private and domestic expenses. Therefore, expenses you incurred flying from Country C to Country D will not be deductible under section 8-1 of the ITAA 1997.

Question 5 - MBA airfare and accommodation for trip to Country E.

You were required as part of your MBA to travel to Country E to complete one of the MBA courses.

On XX XXX XXXX, you took a flight from Country D to Country E, which cost $XX.

From XX XXX XXXX to XX XXX XXXX, you rented accommodation in Country E, which cost $XX.

Between XX XXX XXXX to XX XXX XXXX, you were completing the course.

Between XX XXX XXXX to XX XXX XXXX, you had private holiday in Country E.

Between XX XXX XXXX to XX XXX XXXX, you made a private trip to a Bank.

On XX XXX XXXX, you took a flight from Country E to Country D, which cost $XX.

In these circumstances, it is appropriate to apportion the expense of the airfares and accommodation in Country E between income-earning and private uses. As previously stated, the cost for the course fees of the course, Discover XXXX "Start-up Nation" study tour are deductible as there is a nexus between income-earning activities and the MBA. Thus, you will be able to deductible the apportioned amount of the airfares and accommodation in Country E for the period XX XXX XXXX to XX XXX XXXX.