Tax deductions for self-education expenses

The ATO has issued a new draft ruling which outlines and provides examples for when tax deductions for self-education expenses are available to individuals.

While the draft Ruling does not introduce significant changes, it provides greater clarity by detailing factors and examples that can be considered. Each taxpayer’s situation will determine the deductibility of their self-education expenses.

The draft ruling present numerous examples, the facts and circumstances of each taxpayer will determine if the expense:

• is incurred in gaining or producing assessable income,
• enables you to maintain or improve a skill or specific knowledge, or
• objectively leads to, or is likely to lead to, an increase in your income.

The full draft Ruling can be viewed here.

For employers who subsidise or reimburse self-education expenses for their employees, it’s crucial to understand the implications of the “otherwise deductible” rule in the context of Fringe Benefits Tax (FBT). Under this rule, if an employee could have claimed a deduction for the self-education expenses had they incurred them personally, the taxable value of the fringe benefit provided by the employer can be reduced. This aligns with the principles laid out in TR 2023/D1, making it essential for employers to review the new guidelines to ensure that any benefits provided are compliant with both income tax and FBT laws.

Details

On 27 September, the Commissioner released draft Taxation Ruling TR 2023/D1, addressing the deductibility of self-education expenses incurred by an individual and replaces TR 98/9 which has been withdrawn from 27 September 2023.

The draft Ruling reflects the current rules following the changes in 2022 that removed the $250 non-deductible threshold for self-education expenses.  Therefore, self-education expenditure is deductible from the first $1 spent.

The Commissioner reinforces that self-education expenses will be deductible under section 8-1 to the extent that they:

• are incurred in gaining or producing your assessable income, and
• Are not:
  • capital, private or domestic in natureincurred in gaining or producing exempt or non-assessable non-exempt (NANE) income
  • prevented from being deducted by a specific provision.

A key focus of the draft Ruling is that self-education expenses will be incurred in gaining or producing assessable income if either or both of the following principles apply:

• income-earning activities based on skill or specific knowledge (Principle 1)
• leads to, or is likely to lead to, an increase in your income (Principle 2).

Principle 1

Where income-earning activities are based on the exercise of a skill or specific knowledge, expenses undertaken to maintain that knowledge or skill will be deductible.

The Commissioner notes following factors that the courts have determined when considering if expenses are incurred to maintain or improve knowledge or skills:

• if the knowledge or skills obtained are too general, there will not be a sufficient connection between the expense and the income-earning activity
• the self-education has a necessary connection to your income-earning activities at the time.

Principle 2

Where self-education will objectively lead to, or likely to lead to, an increase in income from your current income-earning activities, the expenses will be deductible.

The Commissioner notes following factors to assist in this determination:

• the increase in income is clearly linked to the self-education undertaken
• a real opportunity for promotion results from the self-education
• the self-education leads to or is likely to lead to a higher pay grade in your current income-earning activities
• the self-education leads to or is likely to lead to a bonus or higher pay grade once completed
• advancement of employment and salary must be a substantial part of you motives for undertaking he self-education.

The draft Ruling also highlights that if you were to cease your income-earning activity whilst you were completing a course, only expenses incurred up to the point when the activity ceases are deductible.

Exclusions

Another key focus of the draft Ruling is the following exclusions that will not be incurred in gaining or producing assessable income:

In addition to examples relation to each principle and exclusion, the Commissioner provides examples of self-education expenses relating to the following:

• course fees (including work-related conferences, HECS-HELP loan, VET Student loan etc.). Employers should remember that Higher Education Loan Program (HELP) charges are not otherwise deductible and the full value is subject to FBT if paid by the employer 
• interest
• books, digital subscriptions and stationery
• airfares, Accommodation and meals (including course and holiday).  This has been an area hotly contested over the years. Unfortunately, the examples provided merely replicate the existing examples in TR 98/9 and are quite simplistic and have an obvious outcome
• transportation costs

Apportionment

The Commissioner says that if an expense is not entirely incurred in gaining or producing your assessable income, it may be apportioned in certain circumstances.

Expenses can be apportioned in the following ways:

• according to its particular purpose where some parts are for an income-producing purpose, and some are not (where the expense has district parts), or
• on a fair and reasonable basis based on your facts and circumstances where the expense is singular.

FBT

From an FBT perspective understanding the “otherwise deductible” rule is of paramount importance. This rule stipulates that if an employee would have been eligible to claim a deduction for self-education expenses had they paid for them out-of-pocket, the taxable value of the fringe benefit that the employer provides can be reduced accordingly. However, to ensure that the otherwise deductible reduction is obtained, an employer should:

• obtain Employee declarations
• ensure that the benefit is covered by a Recurring fringe benefit declaration provided by the employee, or
• ensure that the benefit is covered by a No-private-use declaration prepared by the employer.

This is particularly relevant in light of the newly released draft Taxation Ruling TR 2023/D1, which provides updated guidelines on what qualifies as a deductible self-education expense.

Employers should closely review these new guidelines to ensure that the benefits they offer align with the ruling’s principles. By doing so, they can optimise their FBT liability while also ensuring compliance with income tax laws. This dual compliance not only mitigates the risk of potential penalties but also enhances the employer’s ability to provide meaningful benefits that support employees’ professional development.

How SW can help

The ATO is currently seeking comments on the new draft legislation, with the comments period closing on 27 October 2023.

Once TR 2023/D1 is finalised by the ATO, it is important to note that the ruling will apply both prospectively and retrospectively.

Please reach out to your usual SW advisor or one of our experts for more information about deductibility of self-education expenses or what the draft Tax Ruling might mean for you.

Contributors

Rahul Sanghani

Blake Trad