Private ruling: Self-education expenses
Published: March 2013
Ruling period: Year ended 30 June 2012 | Year ending 30 June 2013 | Year ending 30 June 2014 | Year ending 30 June 2015
Date scheme commenced: 1 July 2011

Ruling: Q1: Are you entitled to a deduction for the cost of obtaining an aircraft licence? | A1: No.

Relevant facts and circumstances: You are a sole trader running a business. A number of your clients are either located, or require you to provide services in, geographically remote areas. These areas can be difficult to access by road and/or rail. You intend to establish a branch from which you will be able to service your clients in the remote locations. This will be achieved by chartering aircraft. Obtaining your aircraft licence will allow you to service your clients more efficiently and help to secure new clients.

Relevant legislative provisions: Income Tax Assessment Act 1936 Former subsection 51(1) | Income Tax Assessment Act 1936 Section 82A | Income Tax Assessment Act 1936 Former section 82JAA | Income Tax Assessment Act 1997 Section 8-1

Reasons for decision: Detailed Reasoning - 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 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. Section 8-1 of the ITAA 1997 is referred to as the general deduction provision of the taxation legislation. Taxation Ruling TR 98/9 deals with the deductibility of self-education expenses. If a taxpayer's income earning activities are based on the exercise of a skill or some specific knowledge and the subject of self-education enables the taxpayer to maintain or improve that skill or knowledge, the self-education expenses are allowable as a deduction. In FC of T v. Finn (1961) 106 CLR 60 at 70; (1961) 12 ATD 348 at 352, Windeyer J stated: ... a taxpayer who gains income by the exercise of his skill in some profession or calling and who incurs expenses in maintaining or increasing his learning, knowledge, experience and ability in that profession or calling necessarily incurs those expenses in carrying on his profession or calling... If a course of study is too general in terms of the taxpayer's current income earning activities, the necessary connection between the self-education expense and the income earning activity does not exist. 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, the self-education expenses are allowable as a deduction. No deduction is allowable for self-education expenses if the study is to enable a taxpayer to get employment, to obtain a new employment or open up a new income earning activity (whether in business or in the taxpayer's current employment). This includes studies related to a particular profession, occupation or field of employment in which the taxpayer is not yet engaged. The expenses are incurred at a point too soon to be regarded as incurred in gaining or producing assessable income. Taxation Ruling TR 95/19 discusses the deductibility of work related expenses. Whilst the ruling discusses the deductions specifically in relation to airline industry employees, the principles it contains can be applied to all taxpayers. TR 95/19 states that a deduction is not allowable for the cost of obtaining an initial licence. A payment for an asset or advantage that has a lasting benefit will be capital in nature. A one-off payment is also more likely to be capital in nature. You operate a business and intend to obtain an aircraft licence which will allow you to improve your service to clients in remote locations. You have argued that the cost of obtaining the aircraft licence should be allowed as your situation is similar to that in the Board of Review case Case J1 77 ATC 1; (1976) 21 CTBR (NS) ( Case J1 ). In Case J1 a taxpayer sought training to qualify as a pilot to enable him to travel between his main office and a proposed branch office of a remote country town. The distance and local road conditions would have made it impractical to consider servicing those branches on a regular basis without the aid of a quick means of transport and the hiring of a commercial pilot to transport the taxpayer would have made the venture uneconomical. The taxpayer claimed deductions in the 1972-73, 1973-74 and 1974-75 financial years in respect of hiring fees for the use of a plane, aero club fees and flying aids, including a correspondence course obtained from a proprietary company. The Board of Review found that the expenditure incurred to obtain a private pilot's licence was not expenditure incurred in the course of the taxpayer's accountancy business and did not have the character of business expenditure under subsection 51(1) of the Income Tax Assessment Act 1936 (ITAA 1936). The Chairman of the Board of Review J.L. Bourke held that the nexus between the outgoings sought as a deduction and the derivation of business income were too remote to support a claim under section 51(1) of the ITAA 1936. However, the course of instruction undertaken to obtain a private pilot's licence came within definition of a prescribed course of education for section 82JAA of the ITAA 1936's purposes and the licence sought was a qualification for the use in the carrying on of the taxpayer's business. Accordingly, the deductions sought were allowed under section 82JAA of the ITAA 1936. In determining if Case J1 can be applied to your situation, we must look at the taxation legislation which existed during 1972-73 to 1974-75 financial years and if it is different to the current taxation legislation. In the 1972-73 to 1974-75 income years, the general deduction provision of the taxation legislation was subsection 51(1) of the ITAA 1936. This provision stated: All losses and outgoings to the extent to which they are incurred in gaining or producing the assessable income, or are necessarily incurred in carrying on a business for the purpose of gaining or producing such income, shall be allowable deductions except to the extent to which they are losses or outgoings of capital, or of a capital, private or domestic nature, or are incurred in relation to the gaining or production of exempt income. Section 51(1) of the ITAA 1936 does not apply to the 1997-98 or later financial years. It was replaced by Section 8-1 of the ITAA 1997. Both of these provisions require a nexus to exist between the expense and how the taxpayer gains their assessable income. As identified by J.L. Bourke in Case J1 there was an insufficient nexus between obtaining a pilot's licence and the taxpayer's income earning activity as an accountant for a deduction to be allowed under section 51(1) of the ITAA 1997. Section 82JAA of the ITAA 1936 was a concessional deduction available for expenses of self-education. It allowed a taxpayer to obtain a deduction for self-education expenses where a deduction would not be allowable under subsection 51(1) of the ITAA 1936 and the expenses were in relation to a prescribed course of education. Section 82JAA of the ITAA 1936 does not apply to the 1975-76 or later financial years and deductions are no longer available by virtue of this section of the legislation. The definition of prescribed course of education is now contained in section 82A of the ITAA 1997. Based on the current taxation legislation, a deduction for self-education expenses will only be allowed where the deduction is allowable under section 8-1 of the ITAA 1997. Section 82A of the ITAA 1997 requires taxpayers who undertake a prescribed course of education to reduce their expense claim by $250 in certain situations. The fact that your course meets the definition of a prescribed course of education does not make your education expenses deductible. Qualifications as a pilot are not normally required for your type of business. It is considered that the flying training will not enable you to maintain or improve your existing skills or knowledge but will provide you with a completely new set of skills and knowledge. In your situation, whilst it is acknowledged that obtaining your aircraft licence may assist you in earning additional income by being able to service remotely located clients, there is not a sufficient connection between the cost of obtaining the aircraft licence and your income earning activities. The cost of obtaining your aircraft licence is not deductible as the expenses do not relate to your income earning activities and, additionally, the expenses would be considered to be capital in nature. No deduction is allowable for the cost of obtaining your aircraft licence.