Private ruling: Deduction - self-education expenses
Published: March 2012
Ruling period: Year ended 30 June 2011
Date scheme commenced: 01 July 2010

Ruling: Q1: Are you entitled to a deduction for the cost of the course? | A1: No

Relevant facts and circumstances: You undertook a course. Completion of the course enables you to apply for admission in the Supreme Court of the state where you live and to work as a legal practitioner. You advised that the PLT course is set up in such a way so that trainees are able to develop their legal skills through mock clients and colleagues in the conduct of mock cases. You advised that some of the skills learnt during the course included (but are not limited to): · drafting legal documents, for example, briefs to counsel, affidavits and court applications · drafting correspondence in a legal manner · advocacy skills, for example, speaking in court, interviewing clients, negotiation and conferencing. · legal research skills · legal file management · providing legal advice by consolidating evidence and engaging in legal research You provided a copy of your application for full credit for the professional placement component of the course. You did not advise what subjects were included in the course. You paid for the course in the 2010-11 financial year. You were not entitled to have your course fees reimbursed by your employer. You began working for your employer in late 2010 as part of a short term internship. This work ended in early 2011 when you resumed your university studies. You worked part time for your employer in a non-ongoing position until the end of your university course. At the time of undertaking the course, you were employed as an entry level employee, working on a part-time basis. This contract was terminated in late 2011. You are unable to locate the candidate kit detailing your duties for the non-ongoing role you were in at the time of undertaking the course. You were subsequently re-employed with the employer on a short term contract as a temporary employee in a different position. You have provided a copy of the selection criteria for the permanent position for which you are currently working in. Legal qualifications (or equivalent relevant experience) and eligibility for admission in relevant jurisdictions for this position are highly desirable but not mandatory. You had an interview for a permanent position in late 2011 for a different permanent position. To date, you have not secured a permanent position. You provided a copy of the selection criteria for this position. This position does not require a candidate to have legal qualifications or eligibility for admission as a legal practitioner.

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. Self-education expenses are deductible under section 8-1 ITAA 1997 where the expenses have the necessary connection with the production of a taxpayer's assessable income The Commissioners view on the deductibility of self-education expenses is contained in Taxation Ruling TR 98/9 which 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) ( Finn's case ). Similarly, 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 deduction is allowable. His Honour, Menzies J in Federal Commissioner of Taxation v. Hatchett (1971) 125 CLR 494; 71 ATC 4184; (1971) 2 ATR 557, considered that the certificate expenses were related to the actual gaining of income because possession of the certificate entitled Mr Hatchett to move to another pay scale and, therefore, to earn more money in the future. It also entitled him to be paid more for doing the same work without any change in grade (125 CLR at 498; 71 ATC at 4186; 2 ATR at 559). However, no deduction is allowable for self-education expenses if the study is designed to enable a taxpayer 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 yet engaged. Such expenses of self-education are incurred at a point too soon to be regarded as incurred in gaining or producing assessable income (see Federal Commissioner of Taxation v. Maddalena (1971) 45 ALJR 426; (1971) 2 ATR 541; 71 ATC 4161; and paragraphs 15, and 48 - 62 of TR 98/9). The principle of 'a point too soon' was established by the High Court in FC of T v. Maddalena 71 ATC 4161; (1971) 2 ATR 541. In this case, a professional football player incurred expenses relating to seeking and obtaining a contract with a new football club. Menzies J stated ' The expenditure would have been incurred in getting, not in doing, work as an employee. It would come at a point too soon to be properly regarded as incurred in gaining assessable income '. While the taxpayer was a professional football player, it is the principle established by the case, not the individual facts of the case that is relevant in this instance. However, if either of the two positive tests are satisfied, in respect of your current employment, the third test cannot be applied to deny a deduction as the expense cannot be regarded as being incurred at a point too soon when it has a direct connection to your current employment. In Case R60 , 84 ATC 447, the Board of Review disallowed self-education expenses. The taxpayer was a public servant and their position required relevant experience or some legal training (which the taxpayer already had) but not legal qualifications as such. In the circumstances, the continuation of the taxpayer's legal studies could not be characterised as a relevant incident of or as part and parcel of his employment. While the legal studies were specified as an advantage for the position held by the taxpayer and the taxpayer's legal training was relied on by the branch he was in, if the studies were discontinued, the branch would not have reacted at all. The branch head saw the encouragement given to the taxpayer as part and parcel of normal staff development. A similar situation was also examined in Case Z1 , 92 ATC 1201; AAT Case 7541 (1991) 22 ATR 3549. In this case, a public servant completing a law degree was employed by various government agencies in positions which required a certain knowledge and skill in the legal field. While their study was favourably considered, was part of the reason for them successfully obtaining the positions and the study was encouraged, the law degree qualifications were not necessary for these positions. The Deputy President said It is not sufficient to say that the payment of the college expenses enhanced her ability to perform the duties of her employment. The authorities indicate that the nexus must be much more direct. I have therefore come to the conclusion that the college expenses cannot be regarded as working expenses. Your situation is comparable to the above cases. You are not required to have or obtain legal qualifications and eligibility for admission to practice as a legal practitioner. These qualifications are highly desirable but not mandatory. During the time of undertaking the course, you were employed as a temporary entry level employee on a part-time basis under a contract until the end of 2011. You finished this course shortly after your contract expired. In the Administrative Appeals Tribunal case Pujara v. Federal Commissioner of Taxation (2003) AATA 331, the taxpayer was enrolled in a Masters of Business Operations Management course at the University of Western Sydney. The purpose of the course was to provide advanced theoretical and practical skills in managing quality in a business organisation, including logistics management and statistical process control. The taxpayer was also employed part-time as an assembler store person for a pharmaceuticals company. His duties included the manual assembly of orders, updating records of bulk stock and assisting with stock distribution. In denying the taxpayer a deduction for his self education expenses, the Tribunal determined that: 'the routine nature of the applicant's activities was such that the necessary skills and performance could be maintained without further training. Objectively, the new information and learning he acquired through the Masters degree was at a higher level than he required for his position. It would not improve or tend to improve his proficiency in a relatively junior role. The "perceived connection" between the Masters degree and the applicant's activities as an assembler store person is missing. The Tribunal is not satisfied, therefore, that the expenditure on self-education during the 1998-99 year of income was incidental and relevant to gaining or producing his assessable income.' (at para. 19) The tribunal also determined that the taxpayer's course of education was unlikely to lead to an increase in his income from his current employment. You applied for the professional placement element of your course, which is the work experience component of the course, based on the work undertaken by you in your employment. While there would have been some general benefits to your skills in undertaking the course, it is considered that your work with your employer contributed to the skills required in undertaking your course rather than the skills obtained in the course being related or relevant to the skills required to do the work with your employer. The self-education was not undertaken to maintain or improve your employment skills. The course is one which is designed to give people competencies in working as a legal practitioner. While you derived assessable income from your employment with your employer in a particular section, it is considered that the requisite connection between the expenditure and the assessable income is absent. The expenses of self-education are incurred to gain a qualification which may assist you in obtaining future permanent employment or open up a new income earning activity. Therefore, you are not entitled to a deduction under section 8-1 of the ITAA 1997 for the expenses incurred in undertaking the course.