It is important to understand the deductibility of self-education expenses and what it can mean for you.

The impacts of COVID-19 have undoubtedly been felt throughout our economy, leaving a trail of uncertainty in consumer and employee confidence.Self-education expenses

It is understandable that this would encourage many within the workforce to consider undertaking additional courses to reinforce and upskill their position within their respective fields. A recent case however has highlighted that although deductions are available for a variety of expenses incurred in self-education, the ATO does have a strict interpretation of what qualifies as deductible self-education expenses.

Amongst other things, the main criteria that needs to be met to claim a deduction for self-education expenses is that:

“The courses you undertake relate to your current work activities”.

 A receptionist currently working in a public practise who undertakes a degree in business administration at a local university would be eligible however, a receptionist who was unemployed would not.

Case summary

In a recent case of Khan and FCT [2021] AATA 367, the employee (Khan), an aircraft maintenance technician, was terminated from his position at Emirates Airlines after following disciplinary proceedings. Khan disputed the termination and while a determination was being made, he flew both interstate and overseas to study courses that would qualify him to work on additional types of aircraft.

The termination dispute was resolved, and the initial termination contract was rescinded, deeming that Khan had in fact resigned from his position, prior to the commencement of the further courses of study. Khan attempted to claim a deduction for self-education expenses; however, they were denied by the Commissioner.

It was held that Khan was undertaking the courses after he was deemed to have resigned from Emirates and before commencing new employment with Etihad. The expenses were in fact incurred while obtaining new employment, rather than being connected with deriving assessable income from his current employment.self-education expenses

Deductibility of training expenses for Khan:

  • Khan was undertaking courses that would increase his skills within his profession while a decision on his unfair dismissal case was being made.
  • The AAT found that he was deemed to have resigned on a date prior to undertaking the courses.
  • The Commissioner did not allow a deduction for self-education as the taxpayer was deemed unemployed at the time.

The mere existence of an employment relationship is insufficient to allow a self-education expenditure deduction. There must not only be an existing employment relationship at the time the expenditure is incurred but there also must be a perceived connection between the outgoing and production of assessable income.

How can I be eligible for a deduction?

The ATO’s narrow interpretation is arguably challenging and likely deemed unfair by many. To ease this confusion, they have issued Taxation Ruling TR 98/9 which provides the following guidelines to determine an individual’s eligibility.

"Self-education expenses are deductible under section 8-1 where they have a relevant connection to the taxpayer's current income-earning activities...The fact that the study will enable a taxpayer to get employment [or] to obtain new employment…is not a sufficient basis in itself for self-education expenses to be deductible."

What to consider?Self education expenses

A clear nexus must be present between the "expense" and the taxpayer's income earned from their current place of employment.

  • The Commissioner will allow for a deduction for self-education if the current employment by which the employee undertakes is based on that of a skill or specific knowledge that self-education will either maintain or improve. For example, a hospitality management course undertaken by a restaurant manager will be deductable as it improves their direct skills and expertise in carrying out their profession.
  • If it is likely that the self-education will lead to an increase in income within their current income-earning activity, a deduction will be allowed. If an individual has an agreement with their employer that if they undertake a self-education course and they will receive a promotion upon completion, then the conditions for a deduction will be satisfied.
  • One of the more crucial distinctions is that a deduction will be denied if the self-education undertaken is designed to get employment, gain new employment, or opens up a new income-earning activity. As discussed in respect to Khan’s case, even if the course of study relates to the two points above, if the individual is unemployed at any time, then the deduction may be denied.

What expenses can you claim?

If the taxpayer falls within the required criteria, then the ATO may allow a deduction for general expenses incurred by the taxpayer while undertaking the course. These can include minor expenses such as stationery and postage however can expand to include the following:

  • Course and tuition fees.Self education expenses
  • Travel and car expenses.
  • Textbooks and academic journals.
  • Accommodation and meals if you need to travel away from home.

The ATO does have some restrictions however on what you cannot claim including:

  • HELP, VET, or other commonwealth loans.
  • Home occupancy expenses such as rent or a mortgage.

Finally, the ATO requires in some circumstances, that a total amount claimed must be reduced by $250.

Key takeaway

COVID-19 may have ignited a dynamic and potentially irreversible change in the workplace and for many, it has been a catalyst to further their professional and academic development.

How can RSM help?

It would be advisable for taxpayers to try to determine the deductibility of self-education expenses prior to paying for a course with their own funds and if you need more advice or clarity on what deductions you may be eligible for, contact your local RSM adviser today.