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This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

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Edited version of private ruling

Authorisation Number: 1011628917723

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Ruling

Subject: Deductions - investment expenses

Are you entitled to a deduction for a fee paid for on-going portfolio management services associated with the purchase of an investment property?

No.

This ruling applies for the following period

Year ended 30 June 2010

The scheme commenced on

1 July 2009

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You are not carrying on an investment business.

You engaged the services of a property services company to develop and implement a property investment portfolio.

The property services company is a property consulting company that specialises in investment property acquisitions and portfolio management.

The company provided you with a personal property investment plan called a 'Statement of Advice' (SOA).

You accepted and signed your SOA. You paid a deposit of $x,xxx. You have provided the SOA-portfolio management agreement which includes the following:

The company does not charge for any advice to clients prior to appointment as portfolio manager or before the acquisition of any property recommended.

The portfolio management fee is for plan, preparation, implementation and ongoing portfolio review services, this is disclosed on an individual property basis.

The portfolio management fee is only charged on you acquiring any properties recommended in the SOA.

Payment is to be made immediately following settlement of the investment property.

The vendor of the investment property may offer commission/referral fees to the company. The company then inturn offers you a rebate(offset) against their fees which is 100% of the commission.

There are no other fees.

The company will source, interview and recommend a suitable property manager for you to engage and provide ongoing assistance, support and advice where required in any dealings with your property manager.

The company will provide you with cash-flow, planning and management assistance. Reviews will provide up to date commentary on asset selection and performance, review your risk management plan and current financial situation will be evaluation, identifying any growth opportunities for your portfolio.

The management fee provides you with ongoing management services for an infinite period but for a minimum of five years.

You proceeded with the SOA recommendation and purchased a property through the company.

You contracted directly with the vendor with out a real estate agent. You signed the contract for sale and the property was settled several months later.

The vendor paid the property services company a project fee (commission/referral rebate/fee) for selling the property. This amount was paid at settlement to the property services company.

You were invoiced an amount by the company as an ongoing portfolio management service fee for the property you purchased. This amount was 100% rebated to you thereby offsetting your fee and resulting in a nil balance.

A real estate property agent was appointed to find a suitable tenant and manage the rental of your property. The property was available for rent once repairs were made to the property.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1.

Reasons for decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Summary

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 incurred in gaining or producing your assessable income. However, a deduction is not allowed where the loss or outgoing is of a capital, private or domestic nature or incurred in relation to gaining exempt income.

A deduction is allowable if an expense:

The expense must actually be incurred by you to be considered for deductibility.

Expenditure incurred in servicing or managing income producing investments (such as ongoing management fees or annual retainers) has a sufficient connection with gaining or producing assessable income and is deductible to the extent that it relates to the gaining or producing of that income (Taxation Ruling IT 39).

Where part of the expense covers other matters or relates to investments that do not produce assessable income, only a proportion of the fee is deductible. For example, an investment advisor may suggest that a taxpayer makes changes to the mix of investments held (without investing additional capital). This type of advice would normally be part and parcel of managing a taxpayers existing investment portfolio and the expenses incurred for this advice would generally be tax deductible.

In your case, you did not incur an expense for the services of the property services company. The amount was the fee invoiced to you by the company as an ongoing portfolio management service fee for the property you purchased. However as the vendor had paid this amount as a project fee to the company at settlement of the property, this amount was 100% rebated to you thereby offsetting your fee resulting in you not having to directly pay the amount to the company.

The expense was not actually incurred by you and is therefore not deductible under section 8-1 of the ITAA 1997.

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