Private ruling: Self-education expenses
Date of advice: 9 May 2016
Published: June 2016
Ruling period: Year ended 30 June 2016
Date scheme commenced: 1 July 20XX

Ruling: Q1: Are you entitled to a deduction for self-education expenses you incurred undertaking your second semester in the relevant year for your combined degree? | A1: No.

Relevant facts and circumstances: You commenced a combined bachelor degree which you expect to complete in several years' time. Your degree major is related to the work you completed during an internship. You signed a contract with your employer after the commencement of your degree and prior to commencing some of the courses of the degree to undertake a full time paid internship over several months during the holiday break. You have been offered and accepted the internship over the following holiday break. You are not required to complete an internship as part of your degree. Your employer requires that you continue your studies in order for you to be able to undertake the internship. You expect that, providing you perform well, the internships should lead to a full time job at the completion of your degree. You undertook courses as part of your degree prior to commencing at your employment. You incurred course fees which were due prior to the commencement of your employment. You pay your course fees yourself and you do not use the HELP program. You have not received an allowance and you have not been reimbursed for the cost of your expenses in relation to your study. You study during your own time and do not require study leave as the employment is whilst the university is on break. You have not received a taxable bonded scholarship to study.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 8-1

Reasons for decision: Summary: Section 8-1 of the Income Tax Assessment Act 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. Taxation Ruling TR 98/9 Income tax: deductibility of self-education expenses incurred by an employee or a person in business discusses (TR 98/9) 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. Similarly, if the study of a subject of self-education objectively leads to, or is likely to lead to an increase in a taxpayer's income from his or her current income earning activities in the future, a deduction is allowable. However, no deduction is allowable for self-education expenses if the study is designed to enable a taxpayer to open up a new income-earning activity, whether in business or in the taxpayers current employment. Such expenses of self-education are incurred at a point too soon to be regarded as incurred in gaining or producing assessable income (see Federal Commissioner of Taxation v. Maddalena (1971) 45 ALJR 426; (1971) 2 ATR 541; 71 ATC 4161; and paragraphs 15, & 48 62 of TR 98/9). Additionally, if short term or casual employment is gained after the commencement of a course of education, expenses in relation to the course will not be deductible, even if the employment does have some connection with the course of self-education. In such circumstances, it is considered that the requisite connection between the expenditure and the assessable income is absent, as the expenses of self-education are incurred to gain a qualification. The self-education is not being undertaken to maintain or improve a taxpayer's employment skills. Paragraphs 55 to 57 of TR 98/9 give examples of industry placement and casual employment taken by university students while studying. The examples state: 55. Example: Stuart wants to be the manager of a hotel. He enrols in a hotel management course, one semester of which involves an industry placement to gain work experience. Stuart is placed with a major hotel where he gains experience in all facets of hotel management, including catering, housekeeping and bar work. He claims a deduction for the cost of the course against income earned during the placement. 56. A deduction is not allowable because the study is designed to get Stuart employment as a hotel manager, not derive income from work experience. It is incurred at a point too soon to be regarded as incurred in gaining or producing assessable income. 57. Example: Shannon, who is undertaking a 4-year university degree in mining engineering, takes a job as a casual employee with a mining company during the end of year holiday period. It is the company's policy to take only students who are pursuing relevant studies. Shannon is not entitled to a deduction for the cost of the course because the study is designed to get future employment in the field. It is incurred at a point too soon. The expenses you incurred for the university courses are considered to have been incurred in the pursuit of obtaining your qualifications and to obtain future employment within your field and not in gaining or producing your assessable income from the internship work you performed. The income you earned from your internship was merely incidental to your studies. The degree provides you with knowledge, skills and qualifications over and above those needed to perform the internship work you undertook. The issue of self-education expenses and casual employment was considered in Gupta v. Federal Commissioner of Taxation 2002 ATC 2319; (2002) 51 ATR 1205 ( Gupta's Case ). In that case the taxpayer commenced a Bachelor of Computer Science degree, and subsequently began casual work at the university's School of Computing and Information Technology as a computer laboratory assistant. After completing his course he remained in the employ of the university as a tutor and researcher. He submitted that there was a direct connection between his self-education expenses and maintaining or improving his skills necessary for the work at the university. Also, that there was a direct connection between the expenses and the higher rates of pay received during the course and subsequent to graduation, when he was appointed a tutor and researcher. His claims were denied. The Administrative Appeals Tribunal found that the essential character of the expenses was to qualify the taxpayer through obtaining his degree so that he could get ahead within the Information Technology industry to a more highly paid position. They accepted that his experience gave him the knowledge necessary for the casual university work, which was relatively low skilled and routine. They found that on completion of the degree, however, the taxpayer would have acquired more highly developed skills, qualifying him to undertake more responsible and demanding work than previously. It was held that the expenses were not incurred in gaining or producing the taxpayer's assessable income from casual work at the university; that income was merely incidental to the studies. The expenses were incurred in getting future work, and they came at a point too soon. You argue that it is not a matter of your studies enabling you to obtain new employment. You argue that was the case for the earlier courses undertaken as part of your degree. You state the courses completed immediately prior to you commencing employment were to enable you to complete employment you had already secured. You state that you continue to undertake the course in order to ensure you can complete the internship offered. Your circumstances are aligned to those in Gupta's case , in that you were studying, albeit during the holiday break, whilst completing an internship. It is considered that your study was to enable you to obtain qualifications that would allow you to secure full-time employment and a more highly paid position at a later date. In the case of Cheung v Federal Commissioner of Taxation [2008] AATA 220; 2008 ATC 10-011 the Commissioner of Taxation v Roberts 92 ATC 4787; (1992) 39 FCR 118 case was referenced where Cooper J emphasised that it is difficult to sustain an argument that expenditure has the 'essential character' of an income producing expense, when there is no continuing employment relationship at the time when the expenditure is incurred. It was found that Cheung's tertiary qualification activity was with a view to improving her future employment prospects and it directed towards the getting rather than the doing of work as an employee (see the Maddalena case). In your case you have argued that by signing the employment contract prior to commencing some of your courses at the university that the expenses were then incurred in gaining the assessable income. However you did not commence earning your assessable income until after the course fees were due and the course completed. There was no continuing employment relationship at the time when the expenditure was incurred and therefore the university fees are not considered to be an income producing expense. Therefore, it is considered that your self-education expenses are not incurred in earning your assessable income. Rather, they are incurred to enable you to complete your studies and to seek better work in your chosen field. As such, the expenses are incurred at a point too soon to be regarded as incurred in gaining or producing your assessable income and are not deductible under section 8-1 of the ITAA 1997.