Private ruling: Self-education expenses and taxation treatment of scholarship
Date of advice: 7 September 2016
Published: November 2016
Ruling period: Financial year ending 30 June 2015
Date scheme commenced: 1 July 2016

Ruling: Q1: Will you be able to claim a deduction for the self-education expenses of your degree? | A1: No. | Q2: Does your scholarship form part of your assessable income? | A2: No.

Relevant facts and circumstances: You are studying a degree full-time. As part of your course, you must undertake approved Industrial Training. You received a scholarship, which included an invitation to undertake work placement with your current company. There was no obligation to work for the company during or after the completion of the degree. The scholarship was based on merit. You currently work part-time for your current company. Upon completion of your course, you will be qualified to take a position as a Graduate at your current company or another company.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 8-1 | Income Tax Assessment Act 1997 Subsection 6-15(2) | Income Tax Assessment Act 1997 Section 51-10 | Income Tax Assessment Act 1997 Section 51-35

Reasons for decision: Detailed Reasoning - Deductions for self-education: Self-deduction expenses are deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) where they have a relevant connection to your current income-earning activities. The expenditure 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; Hayley v. FC of T ( 1958) 100 CLR 478 at 497-498; (1958) 11 ATD 404 at 412). Taxation ruling 98/9 Income tax: deductibility of self-education expenses incurred by an employee or a person in business sets out the circumstances in which self-education expenses are allowable as deductions to individuals under the Income Tax Assessment Act 1936 (ITAA 1936) and the ITAA 1997. A deduction is allowable for self-education expenses if the 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. If a course of study is too general in terms of the taxpayer's current income-earning activities, the necessary connection between the self-education expense and the income-earning activity does not exist. It is important to note that a deduction is not allowable for self-education expenses if the subject of self-education is designed 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) ( FC of T v. Maddalena 71 ATC 4161; (1971) 2 ATR 541) ( Maddalena's Case ). Such expenses are incurred at a point too soon to be regarded as incurred in gaining or producing assessable income. Where, for example, someone is undertaking an industry placement to gain work experience, or obtains casual employment during a holiday period, a deduction is not allowable because the study is designed to get employment, not to derive income. TR 98/9, at paragraph 55-57, gives an example illustrating the application of the principle established by Maddalena's Case. 55. Example: Stuart wants to be the manager of a hotel. He enrols in a hotel management course, one semester of which involves an industry placement to gain work experience. Stuart is placed with a major hotel where he gains experience in all facets of hotel management, including catering, housekeeping and bar work. He claims a deduction for the cost of the course against income earned during the placement. 56. A deduction is not allowable because the study is designed to get Stuart employment as a hotel manager, not derive income from work experience. It is incurred at a point too soon to be regarded as incurred in gaining or producing assessable income. 57. Example: Shannon, who is undertaking a 4-year university degree in mining engineering, takes a job as a casual employee with a mining company during the end of year holiday period. It is the company's policy to take only students who are pursuing relevant studies. Shannon is not entitled to a deduction for the cost of the course because the study is designed to get future employment in the field. It is incurred at a point too soon. The Commissioner also considers that where some form of employment is a requirement of the course of education, or if short term or casual employment is gained after the commencement of the course of education, expenses in relation to the course will not be deductible, even if the employment does have some connection with the course of self-education. In Case VT 90/257 , AAT No 7086, the Senior Member found that a student employed as a design assistant studying an interior design course was not entitled to a deduction for self-education expenses. In that taxpayer's circumstances, the member found the course was the prime object and their employment was simply to provide support during the study. The fact that they worked in the same industry as that of their course was not decisive in this case. In Case Z1 92 ATC 101; AAT Case 7541 (1992) 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. The Commissioner considers that your self-education expenses were incurred at a point too soon to be regarded as incurred in gaining or producing assessable income. The study is designed to qualify you as a Graduate and allow you to obtain employment with your current company or another company in that position, not to derive income from your work placements. Although your employment has a connection to your current study, the study is your prime object and your employment simply provides you with support during the study. | Detailed Reasoning - Scholarship: Subsection 6-15(2) of the ITAA 1997 provides that if an amount is exempt income, it is not assessable income. Section 51-10 of the ITAA 1997 provides, subject to some exceptions listed in section 51-35 of that Act, that a scholarship, bursary, educational allowance or educational assistance payment is exempt from income tax if it is paid to a full-time student at a school, college or university. In general terms, for a scholarship to be exempt from income tax: a) the taxpayer must be in receipt of a scholarship and the scholarship must be provided principally for educational purposes; b) the taxpayer must be a full-time student at a school, college or university; and c) there must be no condition that the taxpayer be an employee of the scholarship provider or enter into any contract with the scholarship provider that is wholly or principally for labour. As you are a full-time student in receipt of a scholarship provided principally for educational purposes and are not required to enter into a contract with the scholarship provider, your scholarship income is exempt from income tax.