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Ruling

Subject: Self education expenses - investment seminars

Question 1

Are you entitled to claim a deduction for self education expenses of share trading courses designed to increase your income from share investing?

Answer

No

Question 2

Are you entitled to claim a deduction for a share trading package subscription fees?

Answer

No

Question 3

Are you entitled to claim a deduction for the decline in value of investment trading software?

Answer

Yes

This ruling applies for the following periods:

Year ended 30 June 2012

The scheme commences on:

1 July 2011

Relevant facts and circumstances

You commenced investing and trading in shares and foreign exchange during the relevant financial year.

You are treating your trading in the subsequent financial year as a capital loss.

During the subsequent financial year you undertook several investment training courses. The courses were undertaken to acquire appropriate training for trading/investing. You were engaged in trading/investing activities that earned income prior to attending the courses.

The courses predominantly relate to trading activities you were not previously undertaking. The courses has led to increased income from the trading/investing.

You undertook a small amount share transactions and more than 100 foreign exchange transactions during the income year, the majority of the foreign exchange transactions occurring after you had completed the courses. You also commenced trading in contracts for differences (CFDs) and covered options after you had completed the courses.

You also purchased share trading software and paid a subscription fee.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1 and

Income Tax Assessment Act 1997 Subsection 40-25(7).

Reasons for decision

Share Trading Activities

In order to ascertain whether the income received from, and any loss incurred in, the sale of shares is either assessable or deductible, it is necessary to first determine whether a taxpayer was carrying on their share trading activity as a business or whether the shares were purchased with the intention of being held as a long-term investment. If the activity can be properly classified a business, any income will be assessable according to Division 6 of the Income Tax Assessment Act 1997 (ITAA 1997), share trading losses will be allowed as a deduction under Division 8 of the ITAA 1997 and shares on hand will be treated as trading stock. 

However, if the shares are held as an investment, they would be considered as assets, the sale of which would cause a Capital Gains Tax (CGT) event under section 104-5 in Part 3-1 of the ITAA 1997. If this was the case, any losses incurred by the taxpayer would not be an allowable deduction, or any receipts from the sale of shares are not assessable. However, any net profit would be subject to capital gains tax. A net loss from sale of shares may not be offset against income from other sources, but may be carried forward to offset against future capital gains made from the sale of shares.

Any costs incurred in buying or selling shares are not an allowable deduction in the year in which they are incurred, but are taken into account in determining the amount of any capital gain.

You are treating your trading in the subsequent financial year as a capital loss.

In the subsequent financial year, you bought and sold a small amount of parcels of shares and undertook slightly more than 100 foreign exchange transactions. You may have had a profit making intention when buying the shares and undertaking foreign exchange trading however when the number of transactions is viewed in relation to a full income year, the nature of the activities is not indicative of a share trader as you do not actively trade shares in any significant quantity or frequency. Similarly, the foreign exchange transactions, while more frequent, were not large in scale and would not be considered the activity of a person in the business of foreign exchange dealing.

You are therefore considered to be an investor rather than a person in the business of share and foreign exchange trading. The expenses that are subject to this private ruling will therefore be considered below in earning your assessable income as a share investor.

Share trading course fees

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 except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income. 

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; (1949) 4 AITR 236; (1949) 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 incidental and relevant to that end. The words "incurred in gaining or producing the assessable income" mean in the course of gaining or producing such income.

Taxation Ruling TR 98/9 discusses the circumstances under which self education expenses are allowable as a deduction. A deduction is allowable 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.

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. 

However, no deduction is allowable for self education expenses if the study is designed to enable a taxpayer to open up a new income-earning activity. Such expenses of self education are incurred at a point too soon to be regarded as incurred in gaining or producing assessable income (Federal Commissioner of Taxation v. Maddalena 71 ATC 4161; (1971) 2 ATR 541).

Similarly, Taxation Determination TD 95/60 states that expenditure on setting up an investment portfolio or commencing share trading activities is incidental and relevant to outlaying the price of acquiring the investment. The expenditure is incurred at a point too soon for a deduction to be allowed.

The courses you undertook gave you knowledge of investment products you had not previously invested in, such as CFDs and covered options. Although the latter part of the course addressed foreign exchange trading which you had previously undertaken to some degree, the predominant purpose of the course was to educate you on writing covered calls with CFDs, and also covered subjects such as covered puts, naked puts, CFD hedging, bonds, commodities and futures trading.

In your case, it is accepted that the knowledge gained during, and at the completion of your course may be of some benefit to you as an investor in that you may be able to exercise your knowledge and skills when selecting investments for capital growth.

However, it is considered that the course fees were incurred at a point too soon, as the knowledge you gained did not relate to investments from which you were currently earning assessable income. Rather, the expenses relate to trading in financial product activities which you were not currently undertaking.

As such, the tuition costs in relation to the investment courses are not an allowable deduction as they are considered to be incurred at a point too soon.

Question 2

Taxation Determination TD 95/60 also discusses the deductibility of ongoing management or subscription fees. TD 95/60 draws the distinction between fees paid to draw up an investment plan and ongoing fees or retainers to maintain those investments. It is considered that expenses incurred in "servicing" an investment portfolio are deductible under section 8-1 of the ITAA 1997.

Taxation Ruling IT 39 discusses the meaning of "servicing" an investment portfolio. It was determined that ongoing management fees or retainers are deductible as part of "servicing" an investment portfolio provided the expenses are incurred to facilitate the production of assessable income.

In your case, the ongoing subscriptions are not considered to lead to the production of assessable income. The subscriptions you receive only give an account of what investing the course provider undertakes, they do not make any recommendations about products to invest in or any particular strategies, nor do they provide any ongoing management of your portfolio. As such they are not considered to be incurred in "servicing" your investment portfolio and are therefore not deductible.

Question 3

Share trading software used for the purpose of obtaining assessable income is considered deductible. However you will not be entitled to claim an outright deduction for the share trading software under section 8-1 of the ITAA 1997.  The reason is that expenditure on the purchase of software is considered to be of a capital nature.

Division 40 of the ITAA 1997 however allows a decline in value (depreciation) deduction on software used in gaining assessable income. The deduction is calculated using the prime cost method with an effective life of 4 years (a rate of 25%).  This rate and method is prescribed by the ITAA 1997 and is the only rate available for calculating decline in value for software expenditure (subsection 40-95(7) ITAA 1997).

Therefore, you will be entitled to claim a deduction for the decline in value of the share trading software under section 8-1 of the ITAA 1997 using the following formula:

Software Decline in Value = (Cost * Days Owned * 0.25) / 365