Self-education expenses - upgrade of pilot's licence to obtain new employment

Are the expenses incurred by the taxpayer in upgrading their existing commercial pilot licence to obtain new employment deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

No. The expenses incurred by the taxpayer in upgrading their existing commercial pilot licence to obtain new employment are not deductible under section 8-1 of the ITAA 1997 as they are incurred at a point to soon in gaining or producing assessable income.

The taxpayer is a commercial airline pilot who received an offer of employment with another airline subject to the taxpayer obtaining a B737-400 endorsement on their Australian licence and passing a proficiency check.

The taxpayer incurred expenses in attending a B737-400 course and obtaining the endorsement on their licence for that aircraft.

Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income.

The courts have considered the meaning of 'incurred in gaining or producing assessable income'. In Ronpibon Tin NL & Tong Kah Compound NL v. Federal Commissioner of Taxation (1949) 78 CLR 47; (1949) 56 ALR 785; (1949) 8 ATD 431 the High Court stated that: 'For expenditure to form an allowable deduction as an outgoing incurred in gaining or producing the assessable income it must be incidental and relevant to that end. The words "incurred in gaining or producing the assessable income" mean in the course of gaining or producing such income.'

The expenditure must therefore be related to the production of assessable income and not incurred at a point too soon to be deductible ( FC of T v. Maddalena (1971) 45 ALJR 426; (1971) 2 ATR 541; 71 ATC 4161).

Taxation Ruling TR 98/9 discusses circumstances in which self-education expenses are allowable as a deduction. If a taxpayer's current income-earning activities are based on the exercise of a skill or some specific knowledge and the subject of self-education enables the taxpayer to maintain or improve that skill or knowledge, the self-education expenses are allowable as a deduction.

Paragraph 14 of Taxation Ruling TR 98/9 states that if the study of a subject of self-education objectively leads to, or is likely to lead to, an increase in a taxpayer's income from his or her current income-earning activities in the future, the self-education expenses are allowable as a deduction.

However, no deduction is allowable for self-education expenses if the study is designed to enable a taxpayer to open up a new income-earning activity, whether in business or in the taxpayer's current employment. Such expenses of self-education are incurred at a point too soon to be regarded as incurred in gaining or producing assessable income (paragraph 58 of Taxation Ruling TR 98/9).

Although the taxpayer was already employed as a pilot, the study was designed to enable the taxpayer to obtain new employment and did not relate to their current income earning activities. Therefore, the expenditure was incurred at a point too soon to be regarded as incurred in gaining or producing assessable income and is not an allowable deduction under section 8-1 of the ITAA 1997.