The ATO issued a new draft ruling TR 2023/D1, which focuses on the availability of deductions for self-education expenses for individuals. For self-education expenses incurred by someone who is not running a business to be deductible, they must be incurred in gaining or generating their assessable income. According to the states, there must be a relationship between the expenses and what the taxpayer does to generate their assessable income.

To determine whether the self-education costs are deductible, the ruling sets out the process. The expenditures must meet one or both of the following conditions:

  • Your income-earning activities depend on the exercise of a skill and self-education allows you to improve that skill.
  • The skill or self-education leads to, an increase in your income from your existing income-earning activities in the future.

However, if either of the conditions apply, the costs won’t be deductible:

  • Self-education allows one to get employment to get new employment or to open new income-earning activities. It includes studies related to a specific profession or field of employment in which you are not yet involved. These costs are incurred at a point too soon to be considered incurred in gaining or generating your assessable income.
  • You are not engaging in income-earning activities to generate assessable income when you incurred the expenses. These expenses are not related to any income-earning activity when they are incurred.

The Income-Generating Activities Depend on Specific Knowledge or Skill

Whether self-education helps in maintaining or improving a particular skill or knowledge is a matter of fact. The ATO has outlined the following findings by courts and tribunals to determine if this condition is satisfied:

  • If the self-education is too general and does not relate to your income-earning activities, then the necessary connection between the self-education expense and the income-earning activity does not exist. This often happens when you take courses for personal development or self-improvement, where the knowledge and skills obtained are too generic.
  • Self-education expenses are deductible if they make you better equipped to perform your current income-earning activities and have a direct connection to them.
  • If you obtain a higher degree of qualification within your industry or profession and the self-education has a direct connection to your income-earning activities, then the expenses are deductible.

It is quite difficult to make the ATO agree that costs on an overseas study tour are deductible. Expenses on an overseas study tour are deductible in certain circumstances where the study tour has the requisite connection to the income-earning activities simultaneously. The ATO confirms that expenditures incurred on enhancing someone’s specific knowledge or skills are not capital in nature.

Leads to or intends to an increase in your income

In checking whether self-education intends to lead to an increase in income from income-generating activities, it is important to address what it is that is productive of the taxpayer’s assessable income. The following aspects have been recognised by courts and tribunals as appropriate when considering whether this condition is met:

  • The increase in income from your existing income-earning activities is clearly associated with self-education;
  • There is a real opportunity for your promotion, which is a result of self-education;
  • The self-education is likely to lead to or lead to your promotion to a higher pay grade in your current income-earning activities;
  • The self-education is likely to lead to or leads to a higher pay grade or bonus on completion of your self-education, where you remain in your current role doing similar activities;
  • The self-education is likely to lead to or leads to a promotion to a position that is not materially different from your position right now;
  • So far as overall purpose is material in your situations, your enhancement of employment grade and salary needs to create a substantial element in the combination of your purposes for opting for self-education.

New Employment or New Income-Earning Activity

If a taxpayer incurs expenses to get employment, get new employment or open a new income-earning activity, the expenses are incurred too soon to be deductible. The following aspects have been found as circumstances in which self-education expenditures are incurred too soon:

  • The self-education is pursued to get new employment depending on proof of arrangement with a prospective employer;
  • The self-education allows you to open up a new income-earning activity, whether in your current employment or business.

Not Undertaking Income-Earning Activities Right Now to Derive Assessable Income

To be deductible, the expenditures need to relate to an income-earning activity that is being carried out when the expenses are incurred. If the taxpayer stops carrying on appropriate income-earning activities part-way via completing a course, only expenditures incurred while undertaking the income-earning activities are deductible. According to the ATO, someone can show a connection with income-generating activities even if they are on unpaid leave while pursuing the course.

Other Practical Issues

Some other points from the ATO’s draft ruling are written below:

  • If a specific course is not deductible entirely, a deduction may be available for some of the course fees where there are subjects in that course that are related to the individual’s employment or income-earning activities. The course fees may have to be divided.
  • A distinction must be made for course fees related to enrolment in a full fee-paying place vs a commonwealth-supported place. This is because course fees are not deductible if they relate to a Commonwealth-supported place.
  • You are not allowed to claim a deduction for expenses incurred to get government assistance that are rebatable benefits.
  • The course fee deductibility is not affected by the individual borrowing money to pay for those fees.
  • Food and accommodation costs can be deductible when the individual is away from home overnight deductible self-education activities.