SBM3303 Taxation: Self-Education Expenses and Assessable Income

This essay delves into the complex relationship between self-education expenses and assessable income under Australian tax law, particularly concerning the "Income Tax Assessment Act 1936" and "ITAA 1997". It addresses the common disputes between taxpayers and the Australian Taxation Office regarding the deductibility of self-education expenditures, focusing on whether these expenses are directly linked to income generation or are for career advancement. The analysis covers key legal precedents, including the "Smith v Federal Commissioner of Taxation (1981)" and "Maddalena v Federal Court of Taxation (1971)" cases, and explores the conditions under which self-education expenses can be claimed as allowable deductions, such as maintaining or improving current income-earning capacity. It further discusses the apportionment of expenses, the impact of employer-provided educational assistance, and the importance of demonstrating a clear connection between the education and the taxpayer's income-generating activities, while also noting the limitations on claiming deductions for courses aimed at obtaining new employment. The essay concludes by emphasizing that deductibility hinges on whether the self-education directly enhances skills related to the taxpayer's present employment.

Running head: TAXATION
Taxation
Name of the Student
Name of the University
Authors Note
Course ID

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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

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cost incurred on courses that is created to get employment, to get a new employment or to
open up the new income generating activity. The principle behind that is the expenditure that
are incurred at the point too soon to be considered incurred in deriving the taxable income.
Expenditure relating to self-education enabling the employee to start a different position with
the identical employee shall be considered as non-deductible expenditure under this standard
(Morgan et al., 2014). The court of law in “Maddalena v Federal Court of Taxation (1971)”
have stated its decision that a taxpayer is not allowed to claim an allowable deduction for the
self-education expenditure if the study is intended to allow the taxpayer to obtain
employment or the get the new employment.
For several years the taxpayers have claimed expenditure related to self-education
against the other income received from the educational assistance namely the commonwealth
or the Austudy. This was based on the premise that the expenditure is required to be incurred
in meeting the acceptable advancement requirement (Sadiq et al., 2014). Further argument
was bought forward that by accepting the Austudy or the other payments, the taxpayer is
under obligation to study and any form of expenditure that is occurred in fulfilling the duty
will be considered as deductible expenditure.
An important consideration can be bought forward regarding the self-education
expense. Some of the decision of the court in the case of “White v Federal Commissioner of
Taxation (1975)” have resulted in confusion by applying the expression of “perceived
connection among the expenditure and deriving of taxable income. Severer test has been
applied by the federal court of law under “section 8-1” in determining the determinants of the
self-education expenses (Ato.gov.au 2017). However, in the decision of “Studdert v Federal
Commissioner of Taxation (1991)” the court of law have regarded more relevant provisions
regarding “perceived connection among the expenditure and deriving of taxable income”.

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Despite of the fact that the self-education expenditure is considered as the allowable
deduction in the preceding paragraph principles however the “taxation ruling of TR 98/9”
does not allows allowable deductions unless it is sustained substantially for the purpose of
work. The ruling further provides that if the claim for deductions goes past $300 a written
evidence is required to prove the total amount of deductions (Woellner et al., 2014). The
deductibility relating to the self-education expenses not only creates an impact on the position
of tax of an individual person but also create an impact on the fringe benefit liability of the
taxpayer. As held in the case of “Federal Commissioner of Taxation v Roberts (1992)” the
court of law has technically followed the established cases having number of short falls (Blog
et al., 2018). The commissioner has also failed to take account of comments of Finn that are
relating to employment by separate people and does not take account of the purpose approach
in ascertaining the deductibility of the outgoings.
A wider and highly liberal approach relating to the deductibility of the self-education
expenditure would promote higher educational qualifications. As pointed out by Pinto (2014),
the spending of government on education have now fallen and it is anticipated a more
onerous user pay system would be introduced. If the users are necessarily required to pay one
method of enabling the users to incur self-education expenditure that is necessary for the
nations development is to allow the taxpayers in claiming tax deductions or income for their
expenditure.
Employers are generally not able to allow an employee to be on leave for a period of
one year or more. They have the options for serval employees to leave the work and pursue to
finish their study (Sadiq et al., 2014). The present law of tax in Australia provides the rule
that expenditure would not be considered allowable for deductions.

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An expenditure would be considered as the allowable expenditure under section 8-1
when the expenditure that has been incurred in producing assessable income. The necessary
character of the expenditure should be determined based on the objectivity of the analysis of
all the surrounding circumstances (Morgan et al., 2014). If the purpose of the study
undertakes by the taxpayer or the attendance to work associated conference is for gaining the
other taxable income the presence of existence or the incidental private purpose does not
create an impact on the character of the associated expenditure as completely incurred in
generating taxable income. The commissioner in the case of “Ronpibon Tin NL v Federal
Commissioner of Taxation (1949)” has identified that there are two forms of expenditure
that needs apportionment in respect to “section 8-1 of the ITAA 1997”.
The first expenses should be in respect of matter where the distinct and the several
parts are devoted in generating the taxable income while the other part is dedicated in gaining
some other income (Krever, 2013). If the taxpayer has incurred expenditure that was entirely
devoted towards private purpose namely having the holiday and producing the attaining or
generating the income that is simply incidental to the personal purpose only those
expenditures would be considered allowable that are attributable to the income generating
purpose.
The second kind of distributable is the solitary expenditure that is serving both the
income generating purpose and some other income generating purpose for indifferent
reasons. The court of law has stated that there cannot be any precise arithmetical division of
the cases and have asserted that there should be certain fair and reasonable division of the
facts of each cases (Pinto, 2014). As a general rule it is necessary to meet the deductibility
test for self-education expenditure and the expenditure is required to have a sufficient
connection with the income generating capacity of the taxpayer. Additionally, the federal
commissioner allows an individual taxpayer to claim for self-education deductions given the

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expenditure is incurred in increasing the taxpayer’s income from their current income
generating activities.
Conclusion:
On a conclusive note, an individual would be able to claim deductions if the self-
education expenditure is related to the course they undertake or improve the specific skills in
their present employment. However, an assertion can be bought forward by stating that it is
time for reviewing the deductibility of self-educational purpose. The expenditure associated
to self-education purpose should be considered for deductions and must be free from fringe
benefit taxation. Alternatively, provision must be made for the expenditure to be depreciated
over the determined period of qualification. Such kind alteration in rules would help
expanding the income and would entirely benefit the entire community in the long run.

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