Self-Education Expenses: assessable scholarship income

Is the taxpayer, a student receiving only assessable scholarship income, entitled to a deduction for self-education expenses under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

No. The taxpayer, a student receiving only assessable scholarship income, is not entitled to a deduction for self-education expenses under section 8-1 of the ITAA 1997.

The taxpayer was enrolled full time at an Australian university and was in receipt of an assisted student scholarship.

The taxpayer's studies were relevant to a particular profession.

The scholarship was paid on condition that the taxpayer would take up employment with the scholarship provider for a certain period of time after completion of their studies.

The taxpayer was not currently employed by the scholarship provider and earned no other income.

Payments made under the scholarship were assessable under subsection 6-5(1) of the ITAA 1997 as they were income according to ordinary concepts (ordinary income).

Payments made under the scholarship were excluded from the exemption for scholarship income in section 51-10 of the ITAA 1997 as the payments were made on the condition that the taxpayer would become an employee of, or enter into a labour contract with, the scholarship provider (paragraphs 51-35(c) and 51-35(d) of the ITAA 1997).

The taxpayer incurred self education expenses, including college residential fees, while they were studying and were in receipt of the scholarship income.

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.

Taxation Ruling TR 98/9 sets out the Commissioner's views on the circumstances in which self-education expenses are allowable as deductions. In general terms self education expenses are deductible where they have a relevant connection with the taxpayer's current income earning activities.

A deduction will not however be allowable if the study was to enable the taxpayer to gain employment or open up a new income earning activity. In these circumstances the expenses are incurred at a point too soon to be regarded as having been incurred in gaining or producing assessable income (paragraph 15 of TR 98/9; FC of T v. Maddalena 71 ATC 4161; (1971) 2 ATR 541).

The self education expenses incurred by the taxpayer were incurred in order to pursue their study. The taxpayer did not incur these expenses in order to earn the scholarship income. Therefore they were not incurred in gaining or producing assessable income for the purposes of section 8-1 of the ITAA 1997. This is consistent with the approach taken in TR 98/9 with regard to certain Commonwealth education assistance schemes (paragraphs 18 & 19 of TR 98/9).

Further the self education expenses were incurred by the taxpayer for the purpose of qualifying themselves to enter a particular profession and open up new income earning opportunities in that field. These expenses were incurred at a point too soon to be regarded as incurred in earning their assessable income.

Consequently, the taxpayer, a student receiving only assessable scholarship income, is not entitled to a deduction for self-education expenses under section 8-1 of the ITAA 1997.