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Concerns about deductibility of self-education expenses incurred by
ANDREW SHAW, PRINCIPAL, SHAW LAWYERS
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“But the point isn’t that they follow the rules; They got an education and they all been in school; Tell me one more time people – what do you say? Without an education, you might as well be dead.” – James Brown “Don’t Be A Dropout” (1966).
Arecent decision of the Administrative Appeals Tribunal (AAT) raises concerns about disallowance of tax deductions for self-education expenses incurred by an employee: YDXM and Commissioner of Taxation. 1 Self-education expenses:
Section 8-1 of the Income Tax Assessment Act 1997 (C’th) provides that: “You can deduct from your assessable income any loss or outgoing to the extent that: (a) it is incurred in gaining or producing your assessable income” and it is not a loss or outgoing of a capital, private or domestic nature.
To be deductible, expenditure must have the “essential character” of a loss or outgoing incurred in gaining assessable income. There must be a “nexus” such that the outgoing is “incidental and relevant” to the gaining of assessable income. It is necessary to determine the connection between the outgoing and the operation by which the taxpayer more directly gains or produces his or her assessable income.2
In Commissioner of Taxation v. Finn (1961) 106 CLR 60, the High Court held that expenditure incurred by a government architect on an overseas tour, of his own volition, devoted to the study of architecture and to advance his architectural knowledge and skills, was an allowable tax deduction. Windeyer J stated: “Generally speaking, it seems to me, a taxpayer who gains income by the exercise of his skill in some profession or calling and who incurs expenses in maintaining or increasing his learning, knowledge, experience and ability in that profession or calling necessarily incurs those expenses in carrying on his profession or calling.”3
In Federal Commissioner of Taxation v. Wilkinson (1983) 83 ATC 4295, the taxpayer was an air traffi c controller employed by the Department of Aviation. He claimed a tax deduction for the cost of taking fl ying lessons. Flying experience was not a prerequisite for his job as an air traffi c controller, nor for promotion. Nonetheless, the Supreme Court of Queensland found that the taking of fl ying lessons would make it “inherently likely” that the taxpayer would be promoted and receive a higher salary. Importantly “one of the main motives (if not his sole motive) was to improve his prospects of promotion and advancement in grade and salary”. The taxpayer became “better equipped to carry out the duties of his employment”. His conduct and expenditure were reasonably calculated to produce that result. Those matters in combination provided a foundation for the conclusion that the expenditure was incurred in gaining the taxpayer’s assessable income and was therefore deductible.
In Federal Commissioner of Taxation v. Studdert (1991) 33 FCR 75 the Federal Court held that a fl ight engineer was entitled to a deduction for expenses incurred on light aircraft fl ying lessons leading to a pilot’s licence. Hill J found that the expenses were relevant and incidental to the activities as fl ight engineer that directly produced the taxpayer’s income. The fl ying lessons improved the taxpayer’s profi ciency as a fl ight engineer (which was the accepted purpose of incurring the expenditure, even if the expenditure also paved the way for retraining as a fl ight offi cer should the taxpayer wish to do so). The lessons also improved his prospects for promotion. Those two fi ndings “made [the taxpayer’s] case virtually unassailable”.4 ATO position:
The ATO’s position is contained in its public ruling TR 98/9 – Income Tax: deductibility of self-education expenses incurred by an employee or a person in business. 5 TR 98/9 sets out fi ve principles of deductibility of self-education expenses:6 1. A deduction is allowable for selfeducation expenses if the taxpayer’s income-earning activities are based on the exercise of a skill or some specifi c knowledge and the subject of self-education enables the taxpayer to maintain or improve that skill or knowledge. 2. A deduction is allowable for self-
education expenses if the subject of self-education leads to, or is likely to lead to, an increase in the taxpayer’s income from current income-earning activities. 3. Expenses relating to improving knowledge or skills are not of a capital nature. 4. 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. 5. The intention or purpose in incurring the expense may be an element in determining whether the expense is allowable.
TR 98/9 gives the following examples of self-education expenses that are allowable deductions to an employee: course or tuition fees incurred in attending an educational institution or work-related conferences or seminars, student union fees, professional and trade journals, stationery, reference books and textbooks, and some airfares, accommodation and meals expenses including overseas study tours, sabbaticals, work-related conferences or educational institutions (subject to substantiation and additional compliance rules).7
Decision in YDXM and Commissioner of Taxation:
The applicant had been employed as a General Services Offi cer (GSO) in the Australian Army since 2012. From 2018 he studied and completed a Juris Doctor degree (a post-graduate law degree undertaken at Masters level). He was not a legal offi cer in the Army and had no intention of becoming one. He was promoted from the rank of Captain to Major in January 2022. His studies were supported by his employer but were not a “requirement” for promotion to senior ranks. He claimed work-related self-education expenses of $6,594 (2018) and $14,834 (2019). The AAT accepted that these were tuition fees for the units studied, plus a small amount for textbooks.8
The AAT framed the relevant test for deductibility of self-education expenses by reference to TR 98/9:9
“15. Specifi cally, there will be such a connection, and consequently the Applicant will be able to claim the self-education expenses as a deduction, if the answer to either of the following is “yes”:
a. Did the self-education undertaken by the Applicant improve his skills or knowledge necessary to perform his role as a GSO (Tax Ruling, para [13]); or b. Could the self-education undertaken by the Applicant have led to an increase in income for the Applicant in his role as a
GSO (Tax Ruling, para [145])?”
Unfortunately for the taxpayer, the AAT decided that that there was an insuffi cient connection between the taxpayer’s expenses incurred in obtaining his Juris Doctor degree and his income earning activity as a GSO in the Army. Therefore, his selfeducation costs were not deductible.
The AAT found that the taxpayer’s position as a GSO was “a leadership and policy-based position in the Australian Army” and that “[h]e infrequently performs some tasks that may be enhanced by a general knowledge of the law, but his core role is not legal in nature”. The AAT then concluded “Whilst Juris Doctor studies may enhance his skills in a general sense, that is not enough to establish a relevant and incidental connection with the gaining or producing of [the taxpayer’s] assessable income”.10
The AAT also found that the taxpayer’s studies could not be regarded as having led to the increase in his income because they were not “required” as part of his promotion application, even though his studies were viewed favourably by his employer and were one of many factors considered in his promotion. However, it could not be said that the taxpayer “spent money to earn more”.11 Conclusions: • The decision of the AAT, and the
Commissioner’s decision to disallow the taxpayer’s claims at objection stage which led to the taxpayer’s application to the AAT for review, suggest a narrower view was taken about deductibility of self-education expenses than what might have been assumed. • The decision seems to turn on the fact that the taxpayer’s self-education expenses related to a post-graduate law qualifi cation even though the taxpayer was not employed in a legal role, and that obtaining a Juris Doctor degree was not “required” for promotion. It does not appear to take into account the wider range of skills that may be gained from a legal qualifi cation which would enhance the skills (or
“improve the profi ciency”, to use
Hill J’s terminology in Studdert) of the recipient even in non-legal roles (e.g., analytical skills, risk assessment, communication skills, problem solving, dispute resolution, etc), or that his studies undoubtedly enhanced his opportunities for promotion. • On my reading, the decision seems at odds with authorities such as Finn,
Wilkinson and Studdert above, but others may take a contrary view. Hopefully the decision does not dissuade employees from seeking to increase their learning, knowledge, experience and ability through self-education.
By Andrew Shaw of Shaw Lawyers.
Tax Files is contributed by members of the Taxation Committee of the Business Law Section of the Law Council of Australia. B
Endnotes 1 [2022] AATA 2382 (27 July 2022). Decisions by the
AAT on deductibility of self-education expenses are important because disputes typically turn on their particular facts and the AAT is often the fi nal arbiter. 2 Ronpibon Tin NL v. FC of T (1949) 78 CLR 47, at 56; Lunney v. FC of T; Hayley v. FC of T (1958) 100
CLR 478 at 497-498. 3 Windeyer J, at 70. The case concerned a deduction under what was then the equivalent provision to section 8-1. 4 Studdert, at para 33. 5 TR 98/9 has been updated since its issue in 1998.
The current consolidated version was published on 13 July 2016. 6 TR 98/9, at Explanations, Part A, paragraphs (a) to (e). 7 TR 98/9 at paras 23, 84 – 92. 8 The study units included Australian Legal System,
Legal Analysis and Problem Solving, Contract Law, and Dispute Resolution. There was no suggestion that the applicant had claimed anything beyond genuine tuition fees; in fact, the AAT noted that he had not claimed reimbursement of his costs from the Defence Assisted Study Scheme because the
Scheme had limited funds and he thought it unfair to draw on those funds when other defence force members without undergraduate degrees may wish to apply for funding for their studies. Nor did he claim the fi rst $250 of his costs because he thought the legislation said something about the fi rst $250 not being claimable. 9 At paragraph 15. 10 At paragraph 40. 11 At paragraph 45.
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