Private ruling: Self Education Expenses
Date of advice: 20 July 2016
Published: August 2016
Ruling period: Year ending 30 June 2016 - year ending 30 June 2017
Date scheme commenced: 01 July 2015

Ruling: Q1: Are you entitled to claim a deduction for an amount relating to your studies that was repaid for a breach of your agreement with your employer? | A1: No.

Relevant facts and circumstances: You were employed under an employment agreement (supplied) Under the agreement, your employer agreed to pay for education expenses, student union fees and stationery as well as salary and wages. It was also a condition of your employment that you study for a degree and work for three years at the company. You left within the three years and had to repay a portion of the expenses paid by your employer.

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. Taxation Ruling TR 98/9 discusses circumstances in which self-education expenses are allowable as a deduction under section 8-1 of the ITAA 1997. If a taxpayer's current income earning activities are based on the exercise of a skill or some specific knowledge and the self-education enables the taxpayer to maintain or improve that skill or knowledge, the self-education expenses are allowable as a deduction. In cases where monies have been repaid by a taxpayer to the employer for breaching the employment contract, the Board of Review (now called the Administrative Appeals Tribunal) have held that such monies are not allowable deductions: Case J20 (1958) 9 TBRD 109, Case J60 (1958) 9 TBRD 308, Case P20 (1963) 14 TBRD 97 and Case G80 75 ATC 564. In your case, at the time that you undertook the study, your study and expenses were paid for by your employer under a contractual arrangement. The amount you now have to repay is the result of your choice to leave the organisation and thereby, not fulfilling your obligations under the contract with the employer. In Case G80 75 ATC 564, the taxpayer became liable to refund to his employer the allowances and tuition fees paid to him as a student in training, for breaching certain conditions. The taxpayer sought a claim for a deduction in respect of the repayments made to his employer for breach of the employment agreement. The Board of Review held at p.564 that: The liability to repay resulted from the taxpayer's breach of the bond agreement and was neither incidental nor relevant to the production of assessable income. The cases before the Board of Review clearly supports the view stated in the ATO Interpretative Decision ATO ID 2002/902 that payment for damages (being repayment of self-education expenses) to the employer by the taxpayer is not related to the earning of assessable income. The payment represents expenditure incurred by the taxpayer for breaching the terms of the employment contract. Therefore, the expenditure for damage cannot be said to have been incurred as a self-education expense. The basis for making the payment resulted from you breaching your agreement with your employer. Your liability to repay the amount relating to your studies was not incidental, nor relevant to the production of assessable income. Rather, the liability you incurred flowed directly from your breach of the agreement with your employer. Accordingly, the amount that was repaid is not an allowable deduction.