Private ruling: Repayment of academic studies
Published: April 2014
Ruling period: Year ended 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Are you entitled to a deduction for self-education expenses repaid to an entity? | A1: No | Q2: Are you entitled to a deduction for legal fees incurred in your dispute the entity? | A2: No | Q3: Are you entitled to a deduction for interest charged on your loan with the entity? | A3: No

Relevant facts and circumstances: You were employed by an entity to achieve a qualification and continue to work for the entity. A condition of your employment was that you were to study for a period of time and then work for the entity for a period of time. You resigned from the entity before completing your period of service. The entity lodged a legal claim to recover your wages and training costs. You incurred legal expenses to dispute the repayment of your wages and training costs. The entity agreed to your deed of release for an amount, the component for three years of academic studies. The amount is due in instalments with the entity charging interest on the outstanding balance.

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

Reasons for decision: Detailed Reasoning - Self-education Expenses: Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) states you can deduct a loss or outgoing if it is incurred in producing your assessable income except where the outgoing is of a capital, private or domestic nature. In your case, the entity required an amount be paid before your deed of your release could be affected, in the event that you resigned before the end of your agreed service. You were required to pay the entity in order to secure your resignation. The amount was for three years of academic studies. The amount you were required to pay is considered to be a buy out of your uncompleted service period, designed to reimburse your employer for the training costs incurred during your service. The amount you have paid was to secure your resignation from the entity without completing your service period. It is not considered to be a self-education expense and was not incurred in the course of earning your assessable income. Therefore, it is not deductible under section 8-1 of the ITAA 1997. | Detailed Reasoning - Legal Fees: Section 8-1 of the ITAA 1997 states you can deduct a loss or outgoing if it is incurred in producing your assessable income except where the outgoing is of a capital, private or domestic nature. In determining whether a deduction for legal expenses is allowed under section 8-1 of the ITAA 1997, the nature of the expenditure must be considered ( Hallstroms Pty Ltd v. Federal Commissioner of Taxation (1946) 72 CLR 634; (1946) 3 AITR 436; (1946) 8 ATD 190). The nature or character of the legal expenses follows the advantage that is sought to be gained by incurring the expenses. If the advantage to be gained is of a capital nature, then the expenses incurred in gaining the advantage will also be of a capital nature. In your case you have incurred legal expenses to dispute the action taken by the entity. The reduction in payment of costs incurred by the entity that you are seeking is capital in nature and consequently the legal expenses incurred in obtaining the redundancy payment are also capital in nature. Accordingly, no deduction is allowable under section 8-1 of the ITAA 1997 for the legal expenses that you incurred. | Detailed Reasoning - Interest Expense: Interest is deductible under section 8-1 of the ITAA 1997 to the extent that it is incurred in gaining or producing assessable income or in carrying on a business for that purpose, except to the extent that the expense is of a capital, private or domestic nature or incurred in gaining or producing exempt income. Whether interest has been incurred in the course of producing assessable income generally depends on the use to which the borrowed funds have been put. The 'use' test, established in FC of T v Munro (1926) 38 CLR 153, is the basic test for the deductibility of interest, and looks at the application of the borrowed funds as the main criterion. As discussed above, the amount you are required to pay is to secure your resignation from the entity without completing your service period. It is not considered to be a self-education expense and was not incurred in the course of earning your assessable income. Therefore, you cannot claim an interest deduction under section 8-1 of the ITAA.