Private ruling: Self education expenses
Published: December 2012
Ruling period: Year ended 30 June 2008 | Year ended 30 June 2009 | Year ended 30 June 2010 | Year ended 30 June 2011
Date scheme commenced: 1 July 2007

Ruling: Q1: Are you entitled to a deduction for course fees incurred while undertaking a Master of Orthodontics (the course) in an overseas country? | A1: No. | Q2: Are you entitled to a deduction for the living cost incurred whilst attending the course? | A2: No. | Q3: Are you entitled to a deduction for travel expenses incurred whilst attending the course? | A3: No. | Q4: Are you entitled to a deduction for interest expenses on a loan draw down to pay for the course and the living costs whilst undertaking the course? | A4: No.

Relevant facts and circumstances: You graduated from university as a Bachelor of Dental Science. After graduating you worked as a General Dental Practitioner where you were legally entitled to, and did, perform some minor orthodontic work on patients. However the majority of the work performed on clients was general dentistry. You then undertook and successfully completed the course at an overseas university. While living and studying overseas you held a student visa only. During the course, you maintained your registration and insurance requirements as a General Dental Practitioner in Australia, and on occasions you practised in that capacity whilst on study leave in Australia. With the new qualification, you could have either resumed practising as a General Dental Practitioner in the area of Orthodontics (whether wholly or in part) or otherwise submit an application to be considered and registered as a specialist in Orthodontics. However, since graduating you now perform mainly orthodontic work on patients. The reason that you undertook the course was to increase your ability to charge more for your services, in that the course will allow you to expand further into the orthodontics field and charge higher fees due to your specialist expertise.

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 (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. A number of significant court decisions have determined that for an expense to satisfy the tests 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; · there must be a nexus between the outgoing and the assessable income so that the outgoing is incidental and relevant to the gaining of assessable income; · it is necessary to determine whether there is the requisite connection between the particular outgoing and the operations or activities by which the taxpayer most directly gains or produces his or her assessable income. Taxation Ruling TR 98/9 discusses the circumstances in which self-education expenses are allowable as a deduction. Generally, a deduction is allowable for 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 the self-education enables the taxpayer to maintain or improve that skill or knowledge in their current employment. Similarly, if the study of a subject of self-education objectively leads to, or is likely to lead to an increase in a taxpayers income from his or her current income earning activities in the future, a deduction is allowable. The decision in FC of T v. Maddalena 71 ATC 4161; 2 ATR 541 supports the Commissioner's view that no deduction is allowable if the study is designed to enable a taxpayer to open up a new income earning activity, whether in business or in the taxpayer's current employment. This would include studies relating to a particular profession, occupation or field of employment in which the taxpayer is not yet engaged. Such expenses are incurred at a point too soon to be regarded as incurred in gaining or producing assessable income (See paragraphs 15 and 48-62 of TR 98/9). The Commissioner also believes that obiter comments of Lee J in FC of T v Highfield 82 ATC 4463; (1982) 13 ATR 426 are consistent with the view discussed above. Although not necessary in order for him to reach his decision, his Honour discussed whether expenses incurred by a dentist in general practice on a post-graduate degree in periodontics would have been allowable if the study had been undertaken to become a specialist periodontist. His honour came to no final conclusion on the matter, but recognised that there were equally competing views. On the one hand, such expenses could be said to be allowable on the basis that the dentist was an independent contractor who was attempting to obtain contracts. On the other hand, the expenses would not be allowable because the dentist was attempting to carry on a different income-earning activity or business, and would be in no different position from a person who undertakes study to obtain a job (82 ATC at 4474; 13 ATR at 439). The Commissioner believes the latter view is the correct application of section 8-1 of the ITAA 1997. In your case, your claim for self education relates to an alternate income earning activity and falls under the scope discussed in Maddalenas case. As a General Dental Practitioner you mainly performed general dental work, even thought you did perform some minor orthodontic work on patients. While we acknowledge that the knowledge and skills gained from the course could be of some assistance in your General Dental Practitioner position, the course is designed to open up a new income earning activity as an orthodontist. Therefore there is an insufficient nexus between the course and your income earning activities as a General Dental Practitioner. As such all expenses associated with your Masters of Orthodontics are considered to have been incurred at a point too soon to be regarded as incurred in gaining or producing assessable income and are not deductible.

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