Edited version of private ruling

Authorisation Number: 1011681438176

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Ruling

Subject: Deductibility of self education expenses and other business expenses

Questions

1. Are you entitled to a deduction for expenses in relation to your mentoring program, where the expenses were incurred before your business commenced?

Answer: No.

2. Are you entitled to a deduction for expenses in relation to your mentoring program and obtaining the credit licence, where the expenses were incurred after your business commenced?

Answer: Yes.

3. Are you entitled to deductions for advertising, telephone expenses, costs of drawing up documents and travel expenses which directly relate to your business and were incurred after the commencement date?

Answer: Yes.

This ruling applies for the following period

Year ended 30 June 2009

Year ended 30 June 2010

The scheme commenced on

1 July 2008

Relevant facts

You did a mentoring program in property dealing, which specialises in creative property investment/positive cash flow investing through the use of options, vendor finance and mortgages.

The course ran for 12 months. As part of the course you were required to attend seminars throughout the duration of the course. The positive cash flow strategies include:

· Wraps (vendor finance) which are long term contracts designed to produce positive cash flow for the investor, and a secure pathway to home ownership for the buyer;

· Rent to own which is a short term arrangement which gives the tenant buyer a way to finance out of the arrangement within a finite time frame, which is usually 2-3 years.

For this business you also need a Credit Licence (required by ASIC) so you have recently completed your Certificate IV in Credit. This has also involved considerable cost for related requirements such as being a member of COSL (external dispute resolution). You are required to obtain professional indemnity insurance which is expected to cost about $2,000 and you will incur costs for payment to the company which is acting as your agent to apply for your licence.

The strategies vary incredibly from house to house; however, it is basically providing positive cash flow property strategies using lease options and vendor finance. Your services can be used 2 ways (1) providing finance (as per mortgages) or in credit services (as in selling houses).

The initial costs were for:

· the mentoring program and the trips for the seminars. There was an initial payment and then monthly payments

· the cost of books required as part of the course

· the cost of the Certificate IV in Credit

· the course on how to apply for a licence.

Your business expenses are:

· the cost of advertising the properties;

· the cost of calling buyers and sellers and meeting them;

· the legal costs of having documents drawn up;

· the cost of being in the Vendor Finance Association

· the cost of attending seminars to both learn and network to find potential joint venture partners;

· travel expenses to attend properties.

You spend time during your lunch time, after work and on weekends completing the duties of this activity.

You have invested in excess of $75,000 of your own capital through various property arrangements.

You commenced newspaper advertising for your services. The first deal did not proceed and accordingly you made no income from it. You were trying to do deals throughout the course, however, it really requires more education and experience to start getting deals to complete. You did not actually complete a deal in the 2009-10 year (to the point of receiving income).

You have entered into a number of transactions in the 2010-11 year.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Reasons for decision

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 necessarily incurred in carrying on a business, except where the outgoings are of a capital, private or domestic nature, relate to the earning of exempt income or are excluded by another provision of the taxation legislation.

Taxation Ruling TR 98/9 discusses the deductibility of self-education expenses. Self-education expenses are deductible where they have a relevant connection to the taxpayer's current income-earning activities. They are not capital expenses.

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.

It is agreed that you have commenced a business activity in the real estate industry as from September 2009. You had an intention to carry on a business providing different services, you have advertised these services and have commenced negotiating deals. The mentoring program you have undertaken relates directly to the work you are undertaking in your business activity. The mentoring program commenced on 1 July 2009 before you commenced your business. There was an initial payments and then monthly payments.

A portion of the self education expenses were incurred prior to you commencing your business in September 2009. As the expenses were incurred prior to you commencing the business they are considered to be incurred at a point too soon and therefore are not deductible. They are not capital expenses and therefore do not fall for consideration under section 40-880 of the ITAA 1997 (black hole expenditure).

The self education expenses you incurred after you commenced your business have a relevant connection to your current income-earning activities. Therefore the expenses relating to your mentoring program and obtaining the credit licence that were incurred after you commenced business are an allowable self education deduction. The obtaining of the credit licence expands the services that your business can provide without opening up a new field.

The general business expenses that you have incurred after commencing your business activity but before deriving any income are deductible. The expenses relate to income to be derived in the future and are necessarily incurred in carrying on your business.