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Edited version of your private ruling
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Ruling
Subject: Membership fees
Question
Are you entitled to a deduction for the expense incurred for a membership fee?
Answer
No.
This ruling applies for the following period:
Year ended 30 June 2012
The scheme commences on:
1 July 2011
Relevant facts and circumstances
You have purchased your first rental property.
In undergoing the process of buying and managing this property, you have engaged the services of a real estate property consultant.
This consultant company provides a real estate consultation service which introduces a membership program.
A fee is paid to become a lifetime member and to educate and assist you in acquiring and managing rental properties. It is a one-off, lifetime membership fee.
The membership provides benefits and assistance in planning and managing all future rental property acquisitions which you make whilst you remain a member.
The membership offers real estate advice and management advice in regards to maximising return on the property in regards to all elements and stages of the property.
The membership provides education on investing in property and offers a planning service where by it will assess your financial position with regards to purchasing the property.
The membership offers access to professional advice regarding tax planning, negative gearing and PAYG variation.
The membership also offers access to reduced fees for various other services regarding property acquisitions such as quantity surveyor fees, conveyancing fees and mortgage broking fees.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 8-1.
Reasons for decision
Summary
The lifetime membership fee grants you the ongoing right to access the resources provided by the program and therefore provides you with enduring benefit. You acquired this benefit with a one-off payment to secure its future use. The membership expense is therefore capital in nature and not deductible under section 8-1 of the ITAA 1997.
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 income except where the outgoings are of a capital, private or domestic nature.
The courts have considered the meaning of incurred in gaining or producing assessable income. In Ronpibon Tin NL Tong Kah Compound NL v. Federal Commissioner of Taxation (1949) 78 CLR 47; 56 ALR 785; 8 ATD 431 the High Court stated that:
For expenditure to form an allowable deduction as an outgoing incurred in gaining or producing the assessable income it must be relevant and incidental to that end. The words incurred in gaining or producing the assessable income mean in the course of producing such income.
The expenditure must therefore be related to the production of assessable income and not incurred at a point too soon to be deductible (FC of T v. Maddalena (1971) 45 ALJR 426; 2 ATR 541; 71 ATC 4161).
Taxation Determination TD 95/60 discusses the deductibility of expenses incurred in obtaining investment advice.
In TD 95/60, the Commissioner considers that expenditure for drawing up an investment plan is not deductible for income tax purposes. This is because the expense is not incurred in the course of gaining or producing assessable income, but rather is relevant to outlaying the price of acquiring the investment. The expense is incurred at a point too soon to be considered part of the income earning process from the investment.
TD 95/60 also states that where a taxpayer has existing investments and goes to an investment adviser 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. This is because the fee is for advice that relates to drawing up an investment plan. The character of the outgoing is not altered because the existing investments fit in with the plan. It is still an outgoing of capital.
Additionally, where expenses are incurred in obtaining advice in relation to acquiring new investments, they will be incurred at a point too soon to be deductible. This will be the case even if a taxpayer already owns investments of a similar nature; the expenses do not relate to the servicing or managing of those investments already in place.
Application to your circumstances
In your case, the fee paid to become a lifetime member covers various financial matters. It provides real estate advice, education on investing in property and offers a planning service to assess your financial position with regards to purchasing a rental property. 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 offers access to reduced fees for various other services regarding property acquisitions such as quantity surveyor fees and conveyancing fees. These costs are capital in nature also, and relate to properties that you may or may not purchase in the future.
The lifetime membership fee grants you the ongoing right to access the resources provided by the program and therefore provides you with enduring benefit. You acquired this benefit with a one-off payment to secure its future use. The membership fee is therefore capital in nature and not deductible under section 8-1 of the ITAA 1997.
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