Deductibility of Self-Education Expenses for Taxpayers

Running head: TAXATION
Taxation
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Introduction:
According to the “Income Tax Assessment Act 1936” income that is derived from the
scholarship or other forms of allowance for educational purpose to the full time students will
be considered as exempt income from tax (Barkoczy, 2014). The exemption is only
applicable if an individual receiving scholarship or other form of receipt is not conditional on
the rendering of services to the person providing payment.
Self-education expenditure is considered as allowable deduction given that there is a
direct association between the education being undertaken and the way a person generates
taxable income (Brokelind, 2014). An individual is allowed to claim an allowable deduction
for the self-education expenditure if an individual is engaged in the work related purpose and
receives a taxable bonded scholarship. The essay will be focusing on the self-education
expenses linked with assessable income and would also determine the deductibility of the
expenses incurred by the tax payer.
Discussion:
Over the years the most common matter of litigation among the taxpayers and the
Australian taxation office has been the self-education expenditure. The primary reason is that
the taxpayers are forced by the employer to undertake a course of study as they believe that
this entitles them to income tax deduction (Coleman & Sadiq, 2013). Others might have the
desire to study independently so that they can improve their income earning or the prospects
of employment and have the identical believe regarding the deductibility of costs related to
self-education course that has been completed.
In addition to this “section 23 (z) of the ITAA 1997” provides that other receipts for
self-education expenditure such as other gifts relating to study have been exempt from
income tax (Blissenden et al., 2018). The federal court passed its verdict in “Smith v Federal

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Commissioner of Taxation (1981)” that a payment that is made by the employer to an
employee on the completion of the course under the encouragement to study scheme was not
considered for assessment for income tax purpose (Ato.gov.au 2017). The payment received
by the taxpayer was not associated with the employment income of the taxpayer. The
payment received was not conditional on the performance of the service to the employer but
the same was held as gift from the employer to employee.
Education grants that are paid by the employer to the employees that have undertaken
an educational course is most likely to be taxed given that there are certain obligations or
services that is required to be performed as the condition of the payment. On noticing that the
payment made by employer does not have any obligation or conditions involved to it and the
same is not the product or incident of recipient employment it would not form the part of the
taxpayer’s taxable income.
Under “section 51 (1) of the ITAA 1997” educational expenditure would be
considered as the allowable expenditure if the expenditure is incurred in attainment or
production of the taxable income or the income has is incurred by the taxpayer necessarily on
the business for the purpose of deriving or producing the taxable income (Ato.gov.au 2017).
The outgoing should be such that there is a relationship between the scholar’s taxable income
and expenses incurred. The traditional test in determining the deductibility of the expenses is
that it must be relevant and incidental in producing the taxable income.
The Australian taxation office believes that it is solely necessary to take account the
first limb of section when taking account, the deductibility of the self-education expenditure.
The key principles are that expenditure must have direct associated with the assessable
income of the taxpayer (Jover-Ledesma, 2014). A taxpayer is allowed to claim deductions for
self-education expenditure to maintain or improve their income earning capacity or

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knowledge that is needed in gaining taxpayers field of employment. If it is noticed that course
of study that is very general in respect of taxpayer’s present income generating capacity the
necessary association amid the self-education expenditure and the income generating capacity
does not exist. The cost incurred by the taxpayer for self-improvement and personal
development course are not considered as the allowable deductions, even though the
deductions might be considered as allowable in certain circumstances.
Preceding from the above discussion, the principles stated above does not generally
functions on the mutually exclusive basis. It is all the time necessary to pay attention towards
the “section 8-1 of the ITAA 1997” and implement them based on the facts. An expenditure
is allowed for deduction under “section 8-1” when the expenses possess the necessary
character of income generating expenditure (Ato.gov.au 2017). The necessary character of the
expenses should be ascertained by the objective analysis of the surrounding circumstances.
There are situations where distribution in respect to “section 8-1” is necessary. For
instance, if an individual attends the conference that is related to work is for income
generating purpose or it is appropriate to apportion the expense amid the purpose (Ato.gov.au
2017). On noticing that if the income generating objective is simply incidental to the central
private purpose then the expenditure that is related directly to the previous objective will be
considered as the allowable. Nevertheless, if the personal purpose is simply incidental to the
chief income generating purpose the apportionment would not be considered appropriate.
An individual would be able to claim an allowable deduction for the self-education
purpose if the subject of self-education is more likely to result an increase in the taxpayer
income generating capacity from their present income deriving activities (Ato.gov.au 2017).
Self-education expenditure associated to improving the knowledge or the skills of taxpayer
are not held as capital in nature. A person is barred from claiming allowable deduction for the