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Ruling

Subject: Rental property expenses

Issue 1:

Question 1:

Are you entitled to a deduction in full for membership fees paid to join an investment commission?

Answer:

No.

Question 2:

Are you entitled to a deduction for a portion of the membership fees paid to join the investment commission?

Answer:

Yes.

Issue 2:

Question 1:

Are you entitled to a deduction for the establishment fee?

Answer:

No.

Question 2:

Are you entitled to a deduction for the annual fee under section 8-1 of the Income Tax Assessment Act 1997?

Answer:

Yes.

This ruling applies for the following periods:

Year ended 30 June 2013

Year ended 30 June 2014

The scheme commences on:

1 July 2012

Relevant facts and circumstances

You own several rental properties.

You have paid a membership fee to join an investment commission.

The investment commission in turn assists you in sourcing and purchasing a property for investment purposes.

The investment commission also pays certain expenses on your behalf, which are covered by the membership fee.

These expenses include accounting services such as the preparation of your income tax return.

You are also looking to purchase a new residential investment property.

An establishment fee is payable.

An annual fee is also payable as a facilitation fee.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1.

Reasons for decision

Issue 1:

Summary

As the membership fee covers various expenses that are capital in nature, you are only entitled to a deduction for a portion of the fee.

Detailed reasoning

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.

To determine whether a deduction is allowable for financial advice under section 8-1 of the ITAA 1997, the nature of the expense must be considered. The nature or character of the financial advice fees follows the advantage which is sought to be gained by incurring the expense. If the advantage to be gained is of a capital nature then the expense incurred in gaining the advantage will also be of a capital nature. Also if the expenses incurred relate to a separate entity, then no deduction is allowable.

Fees paid for obtaining financial advice are ordinarily deductible under section 8-1 of the ITAA 1997 when incurred in servicing an existing investment portfolio. However, to be wholly deductible, all of the fee must relate to gaining or producing of your assessable income. If the advice covers other matters or other entities or relates in part to investments that do not produce assessable income, only a proportion of the fee is deductible. Similarly, if the fee is an initial fee for setting up the investment or financial plan, the cost would be considered to be a capital expense and not deductible.

Taxation Determination TD 95/60 deals with the issue of whether fees paid for obtaining investment advice are an allowable deduction for taxpayers who are not carrying on an investment business.

TD 95/60 explains that a fee for drawing up a financial plan is not deductible because it is not expenditure incurred in the course of gaining or producing the assessable income from the investments. It is too early in time to be an expense that is part of the income producing process as it is an expense that is associated with putting the income earning investments in place. Therefore the expense has an insufficient connection with earning income from the investments, and is considered capital in nature.

TD 95/60 also states that where a taxpayer has existing investments and goes to an investment advisor to draw up an investment plan, the fee paid would be a capital outlay even if some or all of the pre-existing investments were maintained as part of the plan. The character of the outgoing is not altered because the existing investments fit in with the plan. It is still an outgoing of a capital nature.

TD 95/60 also states that on-going management fees or retainers that relate to income producing investments have an intrinsically revenue character and are generally an allowable deduction.

Application to your circumstances

In your case, the membership fee covers various financial matters. A substantial portion of the fee relates to the provision of a financial plan, investment research and acquisition. These costs are capital in nature and incurred at a point too soon to be considered as incurred in gaining or producing your assessable income.

The fee also covers the cost of a wealth specialist consultation. This includes the provision of investment strategies and a review of your personal home loan. These costs do not relate to your current assessable income and as such, no deduction is allowable.

A portion of the fee relates to the provision of accounting services such as the preparation of your income tax return. As this cost is considered an expense for the administration of your tax affairs, the portion of the membership that relates to this service is an allowable deduction.

Therefore, as the membership fee covers various expenses that are capital in nature, you are only entitled to a deduction for a portion of the fee.

Issue 2:

Question 1:

As stated above, 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.

In your case, a fee was paid in relation to the acquisition of the property. Therefore, the fee is considered to be a capital expense and specifically excluded as a deduction under section 8-1 of the ITAA 1997.

Question 2:

In your case, you will incur an annual administration fee in relation to an income producing rental property. The fee is therefore a deductible expense under section 8-1 of the ITAA 1997.

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