Are Self-education Expenses Deductible For Income Tax Purposes?

Issue

Danny, a resident from Australia, by profession was an electrical technician and were working in the Robin Pty Ltd. Recently, he resigned from the company for undertaking three years studies from the Charles Stuart University. This shifting was expected to upgrade the qualification of Mr. Danny from the electronic certificates to a degree for Electrical Engineering. However, the employer from the previous company, MR. Jack verbally told him that if he wishes, can return to the previous position after completion of his studies, though he did not mention anything regarding his salary or the increased position upon completion of studies. Danny participated in the program for student exchange and incurred considerable costs. Further, he was was on the study trip and employed as the casual tutor in the Nanyang University in exchange of a payment of $ 4000. The major issues here were to conclude that whether expenses that were incurred by Mr. Danny were allowable for deduction or not.

The major laws that are applied to resolve the issues are as follows:

Taxation Ruling 98/9
Section 8-1 under the Income Tax Assessment Act 1997
Section 82A under the Income Tax Assessment Act 1936
Hatchett v FCT 71 ATC 4184
FCT v Antis 2009 ATC

The allowable expenses and incomes of an individual for assessing the tax on his income is governed under the Income Tax Assessment Act, taxation ruling and the case laws. Under the The Income Tax Assessment Act 1936 in section 995-1, the term deduction states the amount for which the deduction can be claimed. Only the definition is not enough to determine the amount of allowable deduction (Cazier et al., 2015). Therefore, the taxation rulings, common laws and the case studies must be referred for ascertaining the expenses. Nature of expenses play an important role in determining whether the expenses will be allowable for deduction or not; taking into consideration the nature of the expenses, the capital expenses are not allowed for deduction and the expenses incurred for earning the income that are exempted is not allowed for deduction (Xynas et al., 2014). However, revenue expenses are allowed for the purpose of deduction. Moreover, the expenses for self-education purposes are deductible as per section 8-1, if the individual has any relevant correlation with the current activities of the taxpayers related to earnings of income. If the self-education or study for the subject directs to expenses then there is a likelihood that it will direct to increase the income of the taxpayer from the activities related to the current income in the future and then the expenses related to the self-education will be allowed for deduction. Here, the fact that the taxpayer will be able to get an employment after completing the studies or he will be able to open-up new activity which will enable him to generate income in the future, is not sufficient for getting the expenses allowable for deduction. These studies include the studies for specific profession, field for employment and the occupation, in which the individual not yet engaged (Smith et al., 2016).

The section 8-1(1) of the Income Tax Assessment Act 1997 states that expenses that are incurred for earning or procuring the income that comes under assessable income are allowed for deduction. Moreover, it is explained that the expenses which are spend for earning the assessable income are only allowable for deduction. Further, it is stated under the law that the loss or the outgoings will be allowed as deduction, only if it has been expensed for generation of income for the purpose of business. If the taxpayer is engaged in doing business activities, then the expenditures incurred by the taxpayer for carrying out the business activities will be allowed as deduction (Mahar, Longridge & He, 2016). As per section 8-1 (2) of the Income tax Assessment Act 1997, it is identified that the outgoing expenses or losses will not be allowed for deduction if they are in the nature of the expenses of private expenses, capital expenses will not be allowed for the deduction. Further, in the case of Charles Moore v FCT (1956), it is identified that the taxpayer is entitled to claim deduction if he receive any amount owing to theft from the business store that has been stolen on the gunpoint even if the amount is not insured. If an amount is expensed for reducing the expected future expenses of the taxpayer, that will not be allowed as deduction. Further, the expenditures will be allowed for deduction under section 8-1 if it is essential for generation of income (Buchanan & Consett, 2016). To determine the essentiality the surrounding circumstances are taken into consideration. In some circumstances, it is required to apportion the expenses under the section 8-1. For instance, if the attendance or the study tour at the seminars or the work-related conference is attended for the purpose of generation of income or any private purpose, it is required to apportion the expenditures among the purposes. However, if the purpose of earning income is just incidental to the primary purpose, then the expenditures which are directly related to the previous purposes are allowable for deduction. Again, if the primary purposes are only incidental to the purposes of earning the income, then the apportionment is not suitable (Woellner & Bevacqua, 2017).

Law

The self education expenses which are allowed as deductible expenses are dealt by Taxation Ruling 98/9, the Income Tax Assessment Act 1936 and section 8-1 of the Income Tax Assessment Act 1997. The taxable ruling includes the the provisions related to the allowable deduction for the expenses under taxable income. Expenditure that is connected with the self education will be allowed for deduction if the relevant expenditure and income are related to the current years income and expenses of the tax payer. This ruling is included under the Para 12 of the Taxation Ruling and under section 8-1 of the Income Tax Assessment Act 1997. Further, Para 13 explained that if the taxpayer generated any income out of his knowledge and skills related to self-education that assisted in developing the expertise then the expenditures with regard to the self-education shall be allowed under deduction (Sharkey & Murray, 2015). Further, Para 14 specified that if the study is able to increase the income level of the taxpayer then the expenses will be allowed for deduction. Therefore, as per Para 15 of the Income Tax Assessment Act 1997 if the taxpayer spend for the purposes of self-education and the taxpayer is not yet in that profession will not qualify for deduction. Para 17 explains that the expenses will be qualified for deduction under the Income Tax Assessment Act 1997, section 8-1 if the expenditure is required for generation of the income. However, it shall be taken into consideration that the standard for allowance of expenditures shall not be applied on the basis of mutual exclusivity rather it shall be considered with regard to Income Tax Assessment Act 1997, section 8-1. Therefore, it is suggested that if during the tour for study purpose the tax payer incurred expenses for the purposes of works or for any private purpose then the expenditures must be apportioned among the various purposes. Further, Para 22 of Taxation Ruling explains that the deductions will also be allowed for the reduction in the value of the fixed asset that is for the depreciation in the value of the fixed assets that are held by the tax payer under the Income Tax Assessment Act 1997, Section 40-25 and that were held during the year under consideration and are considered for the purpose of computation of tax. However, if the depreciable assets are used for the purposes of self-education then it will be allowed for the purpose of deduction (James, 2016). Further, the amount of depreciation shall be reduced only to the extent for which the assets are utilised and that are not related to generation of income. Moreover, Para 23 of Taxation Ruling explained that the expenses which are qualified for deduction are as follows:

With regard to the general tests, if the requirements under section 8-1 are met, then the following kinds of expenditures that are related to the self-education are allowable:

Tuition fees or courses for attending the work related conferences, educational institutions, seminars and includes the fees for the student union (Bargain et al., 2015).
Airfares that are incurred for the purposes of study tours in overseas or the sabbatical, attending the educational institution, work related seminars or conference. These expenditures form part of the required expenses for the tour.
Cost related to the trade journals or professional journals, stationary and text books.
With regard to Paragraph 24(C) of the Taxation Ruling, if the taxpayer is away from the home for overnight, then the meals and accommodation expenses incurred in the overseas tour for studies, attending the educational institutions and work related seminars or conferences and
The interest expensed on the borrowed amount where the funds are utilised for payment of the expenses related to the self-study that are associated with the education course, allows the taxpayer to improve or maintain his knowledge or skill or if there is a likelihood that it will lead to generate more income as compared to the current income of the taxpayer. There must be the correlation among the activity of generation of income and the expenses of interest in each of the financial year and the deduction for the interest expenditure can be claimed owing to the alterations in the circumstances. For instance, alteration in the employment may state that the required correlation does not exist anymore (Bradley, 2017).

Further, Para 24 of the Taxation Ruling states that the below mentioned expenses will not be allowed as deduction for the purpose of self-education

The debt repayment and the contributed amount by the student that are specified under Section 26-20 of Income Tax Assessment Act 1997 (Ciconte et al., 2016).
Expenditures related to the meals at the time of attending the work related seminars or conference, educational institutions where there is no need for the taxpayer to stay away from home overnight.
Expenditure with regard to the meals and accommodation where the taxpayer travelled to any other location for the purpose of self-education established any new home (Gennari & Messina, 2014).

Conclusion

Further under Section 82A, it is explained that the expenses for the purpose of self-education, which is defined under the Sub-section 82A(2) Income Tax Assessment Act 1936, includes the expenditures that are required to be incurred in connection with the prescribed course for the education but not take into consideration the contribution of the student or the amount of debt repayment that are specified under the sub-section. Unavoidable and the compulsory expenses as well as the expenses for for which the requirement is shown with regard to fulfilment of the requirement of the course, are considered as being incurred necessarily (Hoffman & Smith, 2014).

On analysis of the given case, it is identified that Danny is employed as the Electrical Technician. The study, which he is intended to take–up are expected to improve his qualification in the same profession in which he is already engaged with. It means the education will contribute towards the increase of Mr. Danny’s earnings. Therefore, on the basis of the fact related to FCT v Hatchett 71 ATC 4184, it can be stated that his expenses shall be allowed under deduction (Robinson, Stomberg & Towery, 2015). Further, the expenses related to the air ticket will be allowable for deduction as per the contents of Para 23 of the Taxation Ruling. Moreover, the expenditures that are expensed for accommodation purposes will not qualify for deduction as per the Taxation Ruling, Para 24. Further, the expenditures with regard to the study materials and the books will qualify for deduction and the paid for purchasing the laptop will qualify for deduction. However, the expenses related to the motor vehicles which were used for the period of 5 months will not qualify for deduction as the vehicle was used for travelling to the education institution based on the case study of FCT v Antis 2009 ATC (Sutherland & Figari, 2013).

The following table is showing the deductions that are qualified for deduction under Section 8-1 of the Income Tax Assessment Act 1997:

Statement showing deduction under section 8-1 of the ITAA 1997
Particulars	Amount
Air ticket	$ 1,500.00
Books and study material	$ 800.00
Purchase of laptop	$ 1,800.00
Allowable deduction	$ 4,100.00

Table 1: Allowable deduction

(Source: Created by Author)

The above table states that the expenses that are qualified for deduction under Income Tax Assessment Act 1997, Section 8-1 are the expenses related to the air tickets, purchase of laptop and the expenses for the study materials and books. Further section 82A of the Income Tax Assessment Act 1936 states that the expenses related to the self-education will qualify for the deduction under section 8-1 of the Income Tax Assessment Act 1997 in the financial year in which the expenses are incurred to the extent amounting to $ 250 (Fitzsimons & Carr, 2014).

Conclusion

It is concluded from the above discussion that Mr. Danny will be allowed for the the deduction amounting to $250 under the Income Tax assessment Act 1997, Section 8-1 during the current financial year.

Reference

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