Edited version of private ruling

Authorisation Number: 1011674399820

This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.

Ruling

Subject: Personal development Program

Are you entitled to a deduction for expenses incurred for the personal development program?

No.

This ruling applies for the following period

Year ended 30 June 2010

The scheme commenced on

1 July 2009

Relevant facts

The arrangement that is the subject of the Ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are:

· the application for private ruling, and

· information about the program as outlined on the relevant website.

You are not employed in the financial industry.

You have participated in a wealth creation program. This program provides consultation sessions to high income individuals. The program is on a one to one basis.

The invoice itemises business/investment costs and personal/general costs.

You received advice on investment opportunities and funding methodologies.

You did not have an investment portfolio.

You signed a contract in 2009 for the purchase of a residential investment property. The property is being constructed.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1.

Reasons for decision

Summary

The program is considered to be too general and private in nature and not sufficiently connected to your income earning activities or investments. Therefore, no deduction is allowable for the costs of the program.

Detailed reasoning

Self education expenses

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 assessable income or 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, or relate to the earning of exempt income.

A number of significant court decisions have determined that, for an expense to satisfy the tests outlined in section 8-1 of the ITAA 1997:

· it must have the essential character of an outgoing incurred in gaining assessable income or, in other words of an income-producing expense (Lunney v. Federal Commissioner of Taxation (1958) 100 CLR 478; (1958) 11 ATD 404; (1958) 7 ATR 166)

· there must be a nexus between the outgoing and the assessable income so that the outgoing is incidental and relevant to the gaining of assessable income (Ronpibon Tin N.L.Tongkah Compound N.L. v. Federal Commissioner of Taxation (1949) 78 CLR 47; (1949) 8 ATD 431; (1949) 4 AITR 236)

· it is necessary to determine the connection between the particular outgoing and the operations or activities by which the taxpayer most directly gains or produces his or her assessable income (Charles Moore & Co (WA) Pty Ltd v. Federal Commissioner of Taxation (1956) 95 CLR 344; (1956) 11 ATD 147; (1956) 6 AITR 379 and Federal Commissioner of Taxation v. Hatchett (1971) 125 CLR 494; 71 ATC 4184; (1971) 2 ATR 557 (Hatchett's case).

Taxation Ruling TR 98/9 discusses the circumstances under which self education expenses are allowable as a deduction. A deduction is allowable for self education expenses if a taxpayer's current income earning activities are based on the exercise of a skill or some specific knowledge and the subject of the self education enables the taxpayer to maintain or improve that skill or knowledge (Federal Commissioner of Taxation v. Finn (1961) 106 CLR 60; (1961) 12 ATD 348; (1961) 8 AITR 406).

Similarly, if the study of a subject of self education objectively leads to, or is likely to lead to an increase in a taxpayer's income from his or her current income earning activities in the future, a deduction is allowable.

Paragraph 42 or TR 98/9 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. The cost of self-improvement or personal development courses is generally not allowable, although a deduction may be allowed in certain circumstances.

To determine whether circumstances exist which would support the deduction for a personal development course we must look to the 'essential character' of the expenditure. It is necessary to determine whether there is a sufficient nexus between the expenditure and the taxpayer's income-earning activities.

In Case U101 87 ATC 616 (Case U101) and Naglost v. FC of T (2001) 2002 ATC 2008; (2001) 49 ATR 1028 (Naglost), the Administrative Appeals Tribunal (AAT) considered the deductibility of expenditure on personal development courses.

Case U101 concerned a taxpayer who was employed as a Taxation Office inspector. He undertook a course on communication, clear self-expression and work organisation. The course was not formally recommended or encouraged by his employer but the taxpayer considered it would assist him to carry out his work more efficiently. The AAT denied the claim and held that there was not a sufficient nexus between the expenditure in pursuing the course and the taxpayer's employment.

Conversely, in Naglost the AAT allowed a partial deduction to a serving member of the Royal Australian Air Force (RAAF) who undertook a course of study at 'Mastery University'. The taxpayer's duties included management responsibilities and the course of study was designed to enhance leadership, management capabilities and decision-making processes. Further, the course was approved by the taxpayer's employer and some expenses were reimbursed by the RAAF.

The AAT held that the expenditure was allowable as it was considered to be directly relevant to the applicant's role as a manager. The applicant had direct management responsibility for a group of 20 to 25 people and was responsible for the unit's physical training, plus occupational health and safety. Therefore, expenditure on the course was considered to be sufficiently relevant to the taxpayer's income producing activities.

Naglost demonstrates that a personal development course will have the 'essential character' of an income-producing expense where a taxpayer can demonstrate a link, not only to skills and knowledge in general, but also to their current duties.

In Hatchett's case, a primary school teacher was not allowed deductions for university fees incurred on an Arts degree course. The university fees had no connection with the activities by which Mr Hatchett gained his income as a primary school teacher. It was not enough that Mr Hatchett's employer encouraged the taxpayer to undertake the course, nor that the course was likely to make Mr Hatchett a better teacher in a general sense.

Cases such as Case M10 (1961) TBRD 69 (Case M10) and Case V13 88 ATC 163 (Case V13) support the view that personal development courses are not considered to be incurred in earning the income from a taxpayer's occupation. These expenses are considered to be incurred in developing the taxpayer's personal capacity and experience, thus are considered to be private in nature. The expenses are more correctly characterised as those which are necessary to put the taxpayer in a position to carry out the income earning activities.

In Case M10, the taxpayer was an agent for a life assurance society. He was denied a deduction for the cost of a Dale Carnegie Course in which he received instruction and training on Effective Speaking, Leadership Training and Human Relations. The prospectus of the course states that the course consists of a combination of public speaking, salesmanship, human relations, personal development and applied psychology. In disallowing the deduction claimed, the member of the Tribunal commented that expenditure by a taxpayer upon development of his personality, self-confidence and self-expression can only be expenditure of a private nature whatever the ulterior purposes may otherwise be served. The course was in the nature of an advanced educational training for people in all walks of life and was private in nature and not allowable as a deduction under section 8-1 of the ITAA 1997.

In Case V13, the taxpayer was a life assurance sales woman. In an attempt to improve her selling skills the taxpayer undertook, at considerable expense, a series of courses in communication, personal development and business skills. The taxpayer's claims for the cost of the course and for depreciation of books were disallowed by the Commissioner and her appeal to the objection was further disallowed by the AAT. In disallowing the claim P M Roach (Senior Member) indicated that he accepted that her studies contributed to her personal development in ways that gave her a greater self-confidence and a greater art of communication and there-by gave her a greater capacity to persuade others to follow courses proposed by her. He stated that despite these contentions, the courses undertaken were principally directed to the personal development of the individual and of her capacities. The courses under consideration were conducted at that level and were so closely and deeply involved with the individual person that they must be characterised as private.

The website for the program states that it provides a personal money management system and service. It also states that it will make daily financial life simple and stress free. The wealth creation program also provides information on financial forecasting.

The content of the program focuses on building wealth for a range of clients. Although the subject matter of this program differs from those referred to in the above cases, the program is also considered to be a self improvement and personal development course.

By applying the principles as established in the above cases to your case, it is considered that the expenses of the program are not themselves directly attributable to the derivation of your assessable income as an employee or investor. You are not currently employed in a financial advice capacity. Unlike Naglost, the program is not directly related to your current income earning activities. The skills to improve your personal cash flow and wealth are not a cost that can be directly connected to the derivation of your assessable income.

While the program may be of assistance to you with your financial choices and investment knowledge, the expenses incurred in acquiring this knowledge and experience are not expenses incurred in gaining your assessable income. Furthermore, the benefits are largely personal and private in nature.

Although improving your financial skills may impact on your working life and investments, it is not a cost that is sufficiently connected to your assessable income. Case V13 provides strong support for this view.

Accordingly, the expenses for the program are considered to be more related to your personal and financial development which is considered to be private in nature. The program does not have a close enough nexus to your income earning activities and is too general in terms of your current income earning activities. Therefore the expenses are not deductible under subsection 8-1 of the ITAA 1997.

Investment advice

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. Fees paid for servicing an existing investment portfolio are generally deductible under section 8-1 of the ITAA 1997.

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. Therefore, the expenses relating to a course or program centred on the topic of setting up investment strategies would not be deductible.

In your case, the participation in the program provides you with knowledge and tips for wealth creation and wealth accumulation. The program does not relate sufficiently to servicing your existing investments.

At the time of incurring the expense you did not have an established investment portfolio and there was minimal income derived from your existing investments. Although you have now purchased an investment property, the expenditure in relation to the program is too remote from the investment property or any other investments to be considered to be incurred in earning the investment income.

It is acknowledged that your invoice shows a business/investment component, however, this does not make it an allowable deduction as you are not carrying on a relevant financial business or investment enterprise.

It is considered that the expenditure was incurred with a view to establishing an investment strategy and not incurred in the course of gaining or producing your current assessable income. Participating in the program gives you a general education about current investment choices and how to invest and earn income in the future. The expenses of the program do not have a direct effect on any current investment income. As the expenditure is directed at the future income from investments, the cost of the program is incurred at a point too soon to be incidental and relevant to your income earning activities from any future investment (FC of T v. Maddalena 71 ATC 4161; (1971) 2 ATR 541).

The expenditure does not have the essential character of expenditure incurred in gaining or producing assessable income. Furthermore, the expense is considered to be capital in nature. Accordingly, no deduction is allowable under section 8-1 of the ITAA 1997.