Self education deductions and expensive MBA programmes

Below is an extract from this paper that covers this often overlooked issue…

There were 11 private ruling requests in 2022 regarding whether a taxpayer could claim self-education deductions for undertaking an MBA, and that was a low year (by Jan 12 of 2023 there were already 2 for 2023). 

The reason for there being so many of these Private Rulings on claiming MBA fees as a deduction are:

  • Each year is an MBA is often a very “general” course, and there is always a question as to whether the MBA relates to the individual’s current work activities. In TR 98/9 the Commissioner states “If a course of study is too general in terms of the taxpayer’s current income-earning activities, the necessary connection between the self-education expense and the income-earning activity does not exist.” (para 42)
  • The costs involved in an MBA are very large and so it is likely that the taxpayer will be subject to some form of review.

Successful private rulings (where the ruling concludes a deduction is available) in 2022 were given to:

  • project managers;
     
  • senior operation managers;
  • construction engineer, project manager and project engineer in the civil construction industry;
  • key account managers;
  • clinical managers of medical practices (that they are also a GP in);
  • employees in business consultancy firms;
  • employees in leadership at a packing and distribution firm;
     
  • management consultants; and 
  • IT professional with management responsibilities, 

All of these have all been successful in getting the Commissioner to give a private ruling saying they could claim a deduction.

The only unsuccessful private ruling related to a person claiming the costs when they had received a scholarship covering the costs, and…

In your case, you enrolled in the Master of Business Administration (MBA) program as a means to facilitate a career transition and pursue a career as an investment professional in Australia. The predominant focus of the MBA program was designed to open a new income earning activity.

You gained new employment while participating in the MBA program. For example, you received a paid internship during breaking between 1st and 2nd year of study; and when you completed the MBA program you gained full time employment. As such, the expenses incurred associated with the program were incurred at a point too soon to be regarded as incurred in gaining or producing assessable income.

Therefore, you are not entitled to a deduction under section 8-1 of the ITAA 1997 for the expenses you incurred in studying the Master of Business Administration.

However, a common question is what if some of the subjects in an MBA are relevant to the taxpayer’s current job, but other have no relevance at all. The Commissioner offers this example on the ATO website:

Example: course overall isn’t connected to current employment

James is an employee civil engineer. His duties include designing water and sewerage systems, determining the materials to be used for the systems, carrying out environmental impact studies, and project management of the projects he works on.

After 10 years in a workplace, James decides to enrol in a Master of Business Administration (MBA) at a university to broaden his career opportunities, including possibly opening his own firm in the future. The cost of each subject is identified in documents he receives from the university.

Not every subject in the MBA has a sufficient connection with James’ current employment activities, and so James can’t claim a deduction for the total course fees. However, if James studies a subject on project management as part of his MBA qualification, that particular subject would have a sufficient connection to his current employment activity of managing projects. James would be able to claim the cost of the project management subject.

The best way to manage our claims for deductions for generally courses like an MBA is to drill down to the courses and then break the courses into three group, being courses that are directly relevant, courses that are indirectly relevant and those that have no relevance. We would then only claim deductions for the relevant courses (both directly relevant and indirectly relevant).

As we saw in the case section, there was a recent case (YDXM v FCT [2022] AATA 2382) where an Australian Army officer was not entitled to claim deductions for self-education expenses incurred on a law degree. He argued due to needing to review contracts in his role (as well as other legal type work) he could claim the entire cost of the degree, but failed as they AAT concluded legal work was not a substantial or consistent part of his role. But I wonder if he had only claimed his unit on contract law, whether the Commissioner would have agreed with the deduction.

Maybe this is the way to manage the risk of a claim that is not clearly relevant to the current employment of the taxpayer – we only claim part of the study, and then only claim the most relevant parts.

Of course the best tax advice is proactive, and in the case of a client wanting to undertaken an MBA, you will want to assist them in undertaking units that will directly relate to their current role to get a deduction.

However, if they were to ask their employer to expand their role, with them taking on more responsibility, this may create more subjects that are related to their role and therefore a greater deduction. 

For example, some MBA programs cover payroll and employment issues in a unit. If the taxpayer was to assist their employer’s HR or payroll functions while studying this unit they would certainly be able to claim a deduction, even if it was only for a few hours a week.

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