Private ruling: Self-education expenses
Date of advice: 17 August 2015
Published: August 2015
Ruling period: Year ended 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Q1: Are you entitled to a deduction for expenses incurred in acquiring a license? | A1: No.

Relevant facts and circumstances: You are employed by a firm where a significant portion of your work relates to transport industry with a focus on transport safety. Your team is also in discussions with a large entity in the transport sector with a view to providing them safety advice. You are currently undertaking study for the purpose of obtaining a private license. You have incurred course fees and other costs in relation to this.

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 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 considers the deductibility of self-education expenses. Generally, self-education expenses are deductible, under section 8-1 of the ITAA 1997, where they have a relevant connection to the taxpayer's current income earning activities. A relevant connection will be found where 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 addition, 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 relevant connection exists and the self-education expenses are allowable as a deduction. However, no deduction is allowable for self-education expenses if the study is to enable a taxpayer to get employment, to obtain new employment or to open up a new income-earning activity (whether in business or in the taxpayer's current employment). This includes studies relating to a particular profession, occupation or field of employment in which the taxpayer is not engaged. The expenses are incurred at a point too soon, or they do not have the required connection to be regarded as incurred in gaining or producing assessable income. In your submission, you have made reference to several court cases where the self-education issue has been argued. Consideration will now be given to those arguments: Studdert v. FC of T (1991) 22 ATR 762; 91 ATC 5006 In Studdert v. FC of T (1991) 22 ATR 762; 91 ATC 5006 ( Studdert's Case ), a qualified flight engineer undertook flying lessons in order to improve his ability to understand and interpret navigation data, identify navigation aids and monitor the pilots' actions. His efficiency was improved and his prospects for promotion were enhanced. The Court found that the course better equipped the taxpayer to perform his duties and that there was a clear connection between the cost and the gaining of the taxpayer's income. In addition, it was found that the flying lessons would assist the taxpayer in promotion to higher grades in his current occupation and was sufficient to support the conclusion that the expenditure was deductible. Your case differs from Studdert in that Studdert was employed in a flight crew role within the aviation industry when he obtained his pilot's license. There was a clear nexus between his course and his employment. Your income earning activities are based on the exercise of a skill and a specific knowledge of legislation in relation to the safety in the transport industry, as well as the law and the legal system as a whole, rather than the need to know how to fly. It cannot be argued that obtaining a license has the required nexus to your income producing activities. FC of T v. Maddalena 71 ATC 4161; (1971) 2 ATR 541 The decision of the High Court in FC of T v. Maddalena 71 ATC 4161; (1971) 2 ATR 541 ( Maddalena's Case) establishes the principle that no deduction is allowable for self-education expenses if the study is designed to enable a taxpayer to get employment or to obtain new employment. Such expenses are incurred at a point too soon to be regarded as incurred in gaining or producing assessable income. We believe that Maddalena's Case also supports the view that 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 taxpayer's current employment. In Case Z1 92 ATC 101; AAT Case 7541 (1991) 22 ATR 3549, a public service clerk studying for a law degree later obtained a legal officer position in the public service. Such expenses of self-education were incurred at a point too soon to be regarded as incurred in gaining or producing assessable income. In your case, as discussed above, the expenses you incurred for your course have insufficient and at most, an incidental connection to your current income earning activities, as one of your duties, provides safety legislation advice to clients in the transport industry, including the aviation industry. The Taxpayer and the Commissioner of Taxation [2011] AATA 318 You have also referred to The Taxpayer and the Commissioner of Taxation [2011] AATA 318 ( The Taxpayer Case ), where a solicitor who specialised in rapid adjudication in the building and construction industry incurred expenses in relation to obtaining an Australian private pilot's license. He argued that the qualification was necessary for the success of an income producing venture of offering aviation law services to aviation clients in the future. The AAT was not satisfied that there was a sufficient connection between the outgoings and the gaining or producing of assessable income. An excerpt from the judgment by MJ Carstairs SM states: 19. The nexus is absent here. I can agree that it is likely that clients seeking aviation law assistance would be attracted to a lawyer holding the skills of a pilot and experienced in flying. But this provides only an indirect connection to the taxpayer's expertise as a lawyer. It is analogous to what Menzies J said of obtaining the Arts degree in Hatchett's case: it could be thought desirable, may make him more rounded in a particular field, it might even be supported by the employer - where the taxpayer is an employee. This is not enough to demonstrate the required connection between the outgoing and assessable income. The taxpayer to my mind has not demonstrated how these practical aviation courses would provide him with any expertise in aviation law - law being the focus of his professional expertise, by which he earns his living. Your case is similar to The Taxpayer Case in that you are employed in an unrelated field to that of the industry. Whilst there is a component of your duties which include a requirement to understand and interpret safety legislation in the aviation and transport industry in general, you are employed in a profession where you are required to understand and interpret the law. It cannot be argued that obtaining a license has the required nexus to your income producing activities. You argue that the reason you are undertaking the course is because you believe that aviation clients would generally prefer a professional with piloting experience and able to understand aviation terms and concepts. However, as already discussed above, this knowledge or ability is too general in nature for the costs in relation to this course to be incurred in the course of gaining your assessable income in your profession. As such, you are not entitled to a deduction for the costs incurred in obtaining your license under section 8-1 of the ITAA 1997 as there is not a sufficient and relevant connection with your current income earning activities and these are essentially a private expense.