Edited version of private ruling

Authorisation Number: 1011516474351

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Ruling

Subject: Pre-business expenditure

1. For the year ended 30 June 2010 or in future income years, can you claim a deduction for amounts paid to XYZ?

No.

2. For the year ended 30 June 2010 or in future income years, can you claim a deduction for your stationary purchased?

No.

3. For the year ended 30 June 2010, can you claim a depreciation deduction for your computer, hard disc and internet set up charges (modem, etc)?

No.

This ruling applies for the following period:

Year ended 30 June 2010

Relevant facts and circumstances

In the year ended 30 June 2010, you intended to start a business as a sole trader, providing training services through the internet. You registered your Australian Business Number (ABN) and for Goods and Services Tax (GST). You paid a small fee for XYZ membership and a substantial fee for a study program. You also incurred expenditure for stationery, a laptop computer, external hard disc and internet set up charges.

You prepared for the start of the business by taking the necessary lessons. However, later during the year ended 30 June 2010 you decided to delay the start of the business due to the prevailing economic situation.

You have again started preparing yourself for the business and you anticipate being fully prepared to start the business in the next income year.

Reasons for decision

General deductions

Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses and outgoings to the extent to which they are necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income, except where the outgoings are of a capital, private or domestic nature.

Taxation Ruling TR 98/9 is about the deductibility of self-education expenses and states:

Self-education expenses are deductible under section 8-1 where they have a relevant connection to the taxpayer's current income earning activities.

If a taxpayer's 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.

No deduction is allowable for self-education expenses if the study is to enable a taxpayer to get employment, to obtain new employment or to open up a new income-earning activity (whether in business or in the taxpayer's current employment). This includes studies relating to a particular profession, occupation or field of employment in which the taxpayer is not yet engaged. The expenses are incurred at a point too soon to be regarded as incurred in gaining or producing assessable income.

Paragraph 98 of Taxation Ruling TR 2001/14 provides guidance about when a business activity has commenced. It states for a business activity to have commenced, a person must have:

· made a decision to commence the business activity

· acquired the minimum level of 'business assets' to allow that business activity to be carried on, and

· actually commenced 'business operations'.

In your case, your XYZ expenditure was for self-education. This expenditure was not a 'license fee', including the membership fee. Although ultimately, membership is required to carry on a business with XYZ, the initial six month membership fee primarily provides access to XYZ training material and events and is primarily self-education expenditure.

As you did not commence any business operations during the year ended 30 June 2010, you cannot claim any deductions for self-deduction under section 8-1 of the ITAA 1997. As stated in TR 98/9, self-education expenses to obtain new employment or to open up a new income-earning activity is incurred at a point too soon to be regarded as incurred in gaining or producing assessable income.

Similarly, your stationery costs are incurred at a point too soon and cannot be deducted because you did not commence any business operations during the year ended 30 June 2010.

Deductions under section 40-880

Section 40-880 of the ITAA 1997 is a provision of last resort that provides a deduction over five years for certain business capital expenditure that is not recognised elsewhere in the income tax law. The term 'business capital expenditure' is capital expenditure incurred in relation to an existing, past or proposed business.

In the High Court of Australia cases of Federal Commissioner of Taxation v. Finn (1961) 106 CLR 60 (at 68-69); (1961) 12 ATD 348 (at 351) and Federal Commissioner of Taxation v. Hatchett (1971) 125 CLR 494 (at 497- 498); 71 ATC 4184 (at 4186); (1971) 2 ATR 557 (at 559), it is made clear that expenses related to improving knowledge or skills are not of a capital nature. The court in those cases rejected the argument that such improvement amounts to the acquisition of something of an enduring nature, similar to plant in a factory.

Also, in respect to depreciating assets, paragraph 40-880(5)(a) of the ITAA 1997 denies a deduction for capital expenditure incurred which forms part of the cost of a depreciating asset.

In your case, you cannot claim a deduction under section 40-880 of the ITAA 1997 for your XYZ expenditure because such expenditure is not 'business capital expenditure'.

You also cannot claim any deductions under section 40-880 of the ITAA 1997 for your computer and hard disc expenditure because such expenditure is specifically disallowed under that section by paragraph 40-880(5)(a).

Depreciation deductions (decline in value)

Section 40-25 of the ITAA 1997 allows a deduction for the decline in value of a depreciating asset to the extent that it is used for a taxable purpose.

Section 40-30 of the ITAA 1997 defines a depreciating asset as an asset that has a limited effective life and can reasonably be expected to decline in value over the time it is used. A computer and hard disc are examples of depreciating assets.

In your case, for the year ended 30 June 2010, you did not use your computer and hard disc for a taxable purpose. It follows you cannot claim a deduction for the decline in value of your computer and hard disc for the year ended 30 June 2010.

However, if you use your computer and hard disc for a taxable purpose in future income years, you may claim a deduction for the decline in value of your computer and hard disc, following the rules found in Division 40 of the ITAA 1997.

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