Until now the policy settings for self-education expenses have been in the “too hard basket”. Previously, discussions have largely focused on curtailing the “cost” to government in terms of restricting the growth in tax expenditure on self-education and other work-related deductions. This was highlighted in 2013 when the Coalition government scrapped Labor’s proposal to put a $2,000 cap on the amount that people could claim as a tax deduction for self-education expenses.
Therefore, any move to revisit the underlying policy rationale for self-education expenses is welcome news for professionals who constantly need to maintain, improve, gain or upgrade their knowledge or skills (including qualifications, technical expertise and professional competency). For example, nurses, doctors, dentists, engineers, architects, lawyers, barristers, accountants, financial planners, stockbrokers, postgraduate students, universities, directors and many other services professionals and tradespeople.
Tax discussion paper
As part of the Tax White Paper process, the government will consider whether the existing rules “strike the right balance” between simplicity and fairness. The tax paper notes that the current rules for claiming a deduction for self-education expenses are somewhat restrictive. This is because self-education expenses may only legitimately be claimed if they maintain or improve the specific skills or knowledge required in someone’s current employment. Accordingly, someone working in one occupation, who is seeking to retrain or reskill so that they can transition to another occupation, generally cannot deduct that expenditure.
In the modern context, structural change in the economy means that re-training is increasingly more important to ensure that ever-changing labour demand needs are met. Indeed, the government’s own 2015 Intergenerational Report has flagged workplace participation and productivity as key drivers of the economic growth needed to maintain our standard of living into the future. As such, tax incentives to acquire new skills may be justifiable in terms of any increased productivity.
However, the paper warns that any loosening of the eligibility for deducting self-education expenses could lead to problems with compliance. Likewise, the government’s Budget position leaves little room to widen the tax concession without identifying benefits to the economy as a whole. Nevertheless, the tax paper at least provides some hope for meaningful tax reform options that could eventually culminate in a Tax White Paper in 2016 for the government to take to the next election.
Self-education expenses – background
Currently, a self-education expense must relate to current income-producing activities of the taxpayer. Expenses incurred in maintaining or improving skills and knowledge in the taxpayer’s present occupation should be deductible, particularly if they are likely to lead to a pay increase. However, a self-education deduction is not available for a course if there is an insufficient connection with the taxpayer’s current employment/profession. Likewise, self-education expenses incurred before commencing an occupation or to obtain a new occupation are generally not deductible.
In FCT v Anstis (2010) 76 ATR 735, the High Court allowed a full-time student in receipt of Youth Allowance a deduction for various self-education expenses (eg a student administration fee, books and depreciation on a computer) as they were considered to be incurred in deriving the Youth Allowance, which was assessable income. However, from the 2011/2012 income year, s.26-19 of the ITAA 1997 was inserted to specifically disallow such deductions against taxable government assistance payments that are eligible “rebateable benefits”.
$250 no-claim amount
Only the excess over $250 is deductible if a self-education expense relates to a course of education provided by a school, college, university or other place of education, and is undertaken to gain qualifications for use in a profession, business, trade or any employment (s.82A of the ITAA 1997). However, the $250 can include expenses that are compulsory and unavoidable but are not otherwise deductible (eg bus fares or child care costs). As such, the $250 no-claim amount can be “used up” by such non-claimable expenses and the taxpayer can then claim all of their deductible expenses.
Salary packaging and FBT
In certain circumstances, it may be more advantageous for an employee to enter into a salary sacrifice arrangement whereby education and training are provided by an employer (or the employer reimburses such expenses incurred by an employee). If the education and training expense is paid (or reimbursed) by the employer, it will not be subject to the $250 no-claim amount. The “otherwise deductible rule” should also operate so that the employer will not be subject to FBT on those work-related education and training benefits, which are expense payment fringe benefits or residual fringe benefits (if provided in-house).
The Treasury discussion paper, Reforms to deductions for education expenses (May 2013), provided an example to illustrate the current use of salary packaging for education expenses. That paper suggested that an employee undertaking an MBA with annual course fees of $25,000 could enter into a salary packaging arrangement with the employer to forgo $25,000 in salary and wages in exchange for the employer paying the course fees on behalf of the employee (an expense payment fringe benefit). Assuming that the MBA meets the income nexus, the Treasury paper stated that the expense would be deductible to the employer and the “otherwise deductible rule” would mean that the employer would not be liable for FBT.
Further details of the deduction rules for work-related expenses (including self-education costs) are set out in Thomson Reuters' Australian Tax Handbook 2015.
The content of this article is intended only to provide a summary and general overview on matters of interest. You should seek legal or other professional advice before acting or relying on any of the content
Stuart Jones BEc LLB is a Senior Tax Writer with Thomson Reuters. He is the author of the Australian Superannuation Handbook and the superannuation chapters for the Australian Tax Handbook.
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