Private ruling: self-education expenses.
Published: August 2017
Ruling period: Year ended 30 June 2016
Date scheme commenced: 1 July 2015

Ruling: Q1: Are you entitled to a deduction for fees totalling $XX to undertake a Masters of Business Administration (MBA)? | A1: Yes.

Relevant facts and circumstances: You were employed by a world-wide company. During the 2015 income year you met with many of your colleagues and realised that you would need to further your education, as an employee of the company. You decided to undertake a MBA. A condition of accepting the offer was to seek agreement from your employer and to confirm dates over the next 18 months. You notified the company of being accepted into the MBA program and the company supported the self-funded initiative. You paid the $X1 acceptance fee in early January 2016. In February 2016 you paid the course fees for module 1 of $X2 After successfully completing module 1 in May 2016, you paid the remainder of the fees for the 2016 calendar year (modules 2-5) - $X3. Your employment was terminated. The MBA fees were not refundable. You have completed over half the course in 2017.

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 the course of gaining or producing the assessable income, but are not allowable to the extent that they are of a capital, private or domestic nature. A number of significant court decisions have determined that, for an expense to satisfy the tests outlined 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 ( Lunney v FC of T (1958) 100 CLR 478); there must be a connection between the outgoing and the assessable income so that the outgoing is incidental and relevant to the gaining of assessable income ( Ronpibon Tin NL v FC of T (1949) 78 CLR 47) it is necessary to determine the connection between the particular outgoing and the operations or activities by which the taxpayer most directly gains or produces his or her assessable income ( Charles Moore and Co (WA) Pty Ltd v FC of T (1956) 95 CLR 344; FC of T v Hatchett 71 ATC 4184). Taxation Ruling TR 98/9 discusses 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). In Thomas v FC of T (2015) ATC10-404, [2015] AATA 687 ( Thomas's case ), the taxpayer was an associate director in the private equity investment team at National Australia Bank (NAB). During that time, he decided to undertake further study on a full-time basis. NAB was generally supportive of the taxpayer's intentions for further study. The taxpayer applied for and was accepted into an MBA course at Ecole des Hautes Etudes Commerciales de Paris (HEC Paris). A payment agreement was signed by the taxpayer, with his father as guarantor. The agreement stated that it was a commitment to pay the course fees in three instalments, the first of which was non-refundable. Just after the taxpayer had paid for his flights, visa and the first instalment of fees he was made redundant by NAB. The Commissioner accepted that the money paid for the flights and the visa were incurred when they were paid, prior to the taxpayer being unemployed, and an allowable deduction. The AAT held that the taxpayer had not incurred the second and third instalments while employed as the commitment to pay was not definite. Only the first instalment of fees was an allowable deduction as it was the only amount deemed non-refundable and incurred in gaining or producing assessable income. | Detailed Reasoning - Course Fees: At the time of commencement of the Course you were employed by the company and it is accepted that the MBA would enhance your skills that are required in that position. This satisfies the test of the expense being connected to your assessable income at the time. Your employment was terminated after paying your course fees, meaning that you were no longer receiving assessable income that could be linked to the expense. However, as discussed above, course fees paid prior to being made redundant were considered to be deductible in Thomas's case . In that case the course fees considered deductible were non-refundable. The course fees you paid of $XX were not refundable. At the time you incurred the course fees, the Course was directly related to your employment making the fees paid in January 2016, February 2016 and May 2016 deductible expenses.