By Robert Krahe
Setting the Scene
Can a student receiving Youth Allowance claim their costs of study, also referred to as self-education expenses against their assessable income? When you consider that the person in receipt of Youth Allowance is assessed and may pay tax on that income, it would seem arguable, in fairness that they should be permitted to deduct self-education expenses incurred against that tax liability.
The long held opinion of the Australian Taxation Office
The Taxation Office of Australia (ATO) has a long held view that self-education expenses incurred through the receipt of Youth Allowance are not deductible under the relevant taxation legislation. It must be born in mind that whilst the ATO may form an opinion on how the law can be interpreted and how the ATO might intend to apply that interpretation, the opinion formed by the ATO is not a statement on what the law is, that is the role of the Courts.
The reason given by the ATO for not allowing self-education expenditure by students receiving Youth Allowance is that they see the expenditure as incurred in connection with the students future employment and therefore too soon in time to be regarded as having been incurred in deriving assessable income. This is to be distinguished from a student who is currently employed and engaged in study.
In order for a self-education expense to be deductible what must be shown is that there exists a link between the students study and employment, which has a relevant connection to the taxpayer’s current income-earning activities. For example, a person who works as a maths teacher would be able to deduct the self-education expenses of undertaking study in advanced mathematics because it will enhance that persons ability to earn greater income in their employment as a maths teacher. What is looked for is whether the self-education expense has enabled a taxpayer to improve or maintain professional skill or knowledge or would lead, or be likely to lead to the taxpayer receiving higher income.
Australian Taxation Office opinion rejected by Federal Court
That the ATO interpretation of the law is not always correct was vividly demonstrated in the recent decision handed down by The Full Federal Court of Australia. In which the stance taken on the deductibility of self-education expenses, long held by the ATO, was put aside in the wake of Federal Commissioner of Taxation v Anstis [2009] FCAFC 154. The facts of the case involved a student who was in receipt of Youth Allowance while undertaking a teaching degree. At the end of the 2005/06-tax year the student furnished her tax return in which she declared income from employment unrelated to her study, as well as Youth Allowance. No income was declared in relation to employment as a teacher.
The student argued that the expenses she incurred, being textbooks, pens, paper, laptop depreciation etc was necessary in order to complete her course of study and continue to receive her assessable income, that being Youth Allowance. In order to do this the student’s argument was that the character of the expenditure should be seen as necessary in order to meet her study requirements and satisfy the ongoing eligibility criteria applicable to Youth Allowance under the Social Security Act, namely continued enrollment in an approved course of study. The Commissioner sought to counter the student’s argument by contending that the expenditure was not connected with the receipt of Youth Allowance. In his submission to the Court the Commissioner contended that as the student had begun her course of study with the view of becoming a teacher, that the expenditure was incurred with the view of gaining future employment rather than the retention of Youth Allowance.
What questions the Court asked
The Full Federal Court of Australia,in considering these two competing arguments, looked to long-standing authority from the High Court of Australia as to whether the issue was one of looking to what the purpose of the expenditure was or whether the issue was whether the expenditure was incurred in gaining that income. The High Court in a decision referred to as Ronpibon Tin NL v Federal Commissioner of Taxation stated that an expense, in order to be deductable, requires the outgoing to be ‘incurred in the course of’ gaining or producing the taxpayers assessable income’.
The key question then being did the student incur the expenditure in the course of gaining or producing
her assessable income?
The Court found the student’s income was due to her receipt of Youth Allowance and having preserved that qualification throughout the relevant period by satisfying the requirement of undertaking and progressing through her teaching degree. The Court reasoned that even though it may be true to say that the student did undertake her course of study for the purpose of obtaining a teaching degree and obtaining employment in the future; the correct interpretation of the taxation legislation was whether the expense was incurred in the course of deriving assessable income, not whether the outgoing was incurred for the purpose of deriving assessable income.’
To put that another way, the Court was only concerned with whether the student spent her money purchasing text books for study and because of that was able to progress through her teaching degree and therefore receive income in remaining eligible for Youth Allowance; the expenditure then being incurred in the course of her study. The question is not whether she expended those monies for the purpose of receiving income from Youth Allowance or whether she spent the money for the purpose of in the future earning income through employment as a teacher. The student did not need to show that she enrolled in a teaching degree in order to qualify for Youth Allowance.
What this means to you
Although the Full Federal Court confirmed that students could deduct self-education expenses incurred in retaining Youth Allowance, this position it seems, has not yet been fully accepted by the ATO. The ATO has sought leave to appeal to the High Court of Australia and announced that until the appeal is heard it will continue to apply it’s long held view that you cannot claim a deduction for self-education expenses. Those receiving Youth Allowance and considering claiming deductions for study expenses may in the meantime want to consider seeking advise from a qualified taxation adviser. At the very least the Federal Court has left the door open, for the time being, for students to claim their self-education expenses.
