Edited version of your private ruling

Authorisation Number: 1012454960753

Ruling

Subject: Deductions - investment fees and computer and internet use

Question 1

Are you entitled to a deduction for the Teaminvest membership joining fee?

Answer

No

Question 2

Are you entitled to a deduction for the monthly Teaminvest fees?

Answer

Yes

Question 3

Are you entitled to a deduction for the portion of internet expenses referable to your share investing activities?

Answer

Yes

Question 4

Are you entitled to a deduction for the decline in value of your computer referable to your share investing activities?

Answer

Yes

This ruling applies for the following periods

Year ended 30 June 2013

The scheme commenced on

1 July 2012

Relevant facts and circumstances

You are an online share investor.

You have a share portfolio worth $xx.

You intend to join an investment service provider in the coming months.

You will use your computer and internet access to access the investment software and periodic updates.

The joining membership fee and monthly continuing fees are for:

· Receiving daily price and data updates

· Training on software

· Attendance at all regular master classes, triages and webinars

· Access to the 'member only' section of the investment website, including RAP summaries, company reports, member intelligence and knowledge base.

You have invested in shares with the intention of earning income from dividends and capital growth.

By joining the investment service provider you contend that you will be able to better construct your current share portfolio with the addition of new, better quality stocks, and through the sale of poor performing stocks.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1936 subsection 51-1(1)

Income Tax Assessment Act 1997 subsection 8-1(2)

Income Tax Assessment Act 1997 section 42-15

Income Tax Assessment Act 1997 section 42-170

Reasons for decision

Summary

The membership joining fee is incidental to acquiring the ongoing investment advice and education which will assist you in your income producing activities, and is therefore capital or capital in nature, and not deductible under section 8-1 of the ITAA 1997.

Your ongoing monthly fees are an allowable deduction under section 8-1 of the ITAA 1997 because they relate to the earning of your assessable income.

Your internet costs are an allowable deduction under section 8-1 of the ITAA to the extent that they relate to your income producing activities. Similarly, the portion of the cost of your computer which relates to your income producing activities may be depreciated over its effective life of four years.

Detailed reasoning

Under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) you can claim deductions for expenses 'to the extent' that they are incurred in gaining or producing your assessable income, or they are necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income.

You cannot claim deductions under section 8-1 of the ITAA 1997 for expenses 'to the extent' to which they are of a capital, private or domestic nature or they are incurred in gaining or producing exempt income.

Membership joining fee

Taxation Determination TD 95/60 - Income tax: are fees paid for obtaining investment advice an allowable deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for taxpayers who are not carrying on an investment business? considers the deductibility of membership joining fees where there is a continuing relationship with the investment advice provider:

In discussing what makes expenditure deductible under subsection 51(1) of the Income Tax Assessment Act 1936 , Lockhart J said in F C of T v. Cooper 91 ATC 4396; 21 ATR 1616 (at ATC 4399, ATR 1620):

'The phrase "incurred in gaining or producing assessable income" in the first limb of s. 51(1) has been construed to mean incurred in the course of gaining or producing assessable income...

'For expenditure to be an allowable deduction as an outgoing incurred in gaining or producing the assessable income, it must be incidental and relevant to that end; ... This test of deductibility has been explained in subsequent judgments of the High Court, so that to be deductible the expenditure must be incidental and relevant in the sense of having the essential character of expenditure incurred in the course of gaining or producing assessable income ... The essential character test is also applied to determine if the expenditure is of a capital, private or domestic nature...'

This reasoning has equal application to section 8-1 of the ITAA 1997, as the replacement provision for subsection 51(1).

In your circumstances, the membership joining fee is to provide you with access to the online database, and an entitlement to attend master classes and other training in the future. It also entitles you to training in the investment software, which you will use to gain further knowledge in your share trading activities. This membership joining fee is not expenditure incurred in the course of gaining or producing assessable income from your share portfolio. It is too early in time to be an expense that is part of the income producing process.

The membership joining fee is incidental to acquiring the ongoing investment advice and education which will assist you in your income producing activities, and is therefore capital or capital in nature, and not deductible under section 8-1 of the ITAA 1997.

Ongoing monthly fees

Paragraph 5 of TD 95/60 states that:

On-going management fees or retainers are deductible under section 8-1 of the ITAA 1997.

In your circumstances, the ongoing monthly fee relates to accessing knowledge and software to acquire investment advice to improve your share portfolio and increase the income you receive from dividends or capital growth. Therefore, your ongoing monthly fees are an allowable deduction under section 8-1 of the ITAA 1997.

Internet access and computer use

A number of occupational rulings issued by the Commissioner discuss the general deduction provision of section 8-1 of the ITAA 1997. The rulings explain that a number of significant court decisions have determined that, for an expense to be deductible under 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;

· 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; and

· 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.

· You use your computer and internet access for the purpose of managing your share portfolio. The expense of obtaining that information is incidental and relevant to production of your assessable income derived from your share trading. There is a clear connection between the expense of obtaining and analysing financial information and the derivation of dividend income.

Based on this information, your expenses in using your computer and internet access to manage your share portfolio are expenses incurred in gaining your assessable income.

However, a deduction will be denied under subsection 8-1(2) of the ITAA 1997 to the extent that the expense is a capital or private expense.

The cost of subscription to an internet service provider for the purpose of obtaining financial information and investment advice is an expense incurred in gaining your assessable income. However, as stated above, a deduction under subsection 8-1(2) will be denied to the extent that it is a private expense. If you also use the internet service for private purposes, a portion of the costs will not be an allowable deduction.

You must be able to demonstrate how you have calculated your income producing use of the internet. The occupational rulings issued by the Commissioner (such as Taxation Ruling TR 98/14 for journalists) discuss acceptable methods of calculating telecommunication expenses.

A similar principle should be applied in apportioning the cost of any other computer related expenses, such as ink cartridges, to determine the extent that the expenses relate to your income producing activities.

The purchase of a computer is a capital outlay. Therefore, the cost of the computer cannot be claimed as an outright deduction under section 8-1 of the ITAA 1997.

Section 42-15 of the ITAA 1997 allows you to deduct an amount for the decline in value (depreciation) of a unit of plant for an income year if in that year:

· You are its owner

· You use it for the purposes of producing assessable income.

Section 42-170 states that you must reduce your deduction by an amount that reasonably reflects the extent that you did not use the plant for producing assessable income.

You will use your computer to access the information made available by the investment service provider to assist in the ongoing management of your share portfolio. As discussed above, this satisfies the requirement that the plant be used for the purpose of producing assessable income.

To calculate your depreciation deduction, you need to establish the effective life of the computer and the percentage rate applicable. Taxation Ruling TR 2012/2 - Income tax: effective life of depreciating assets shows the rates of depreciation applicable based on the Commissioner's determination of the effective life of items of plant. It says that a computer's effective life is four years. Therefore, you can depreciate the percentage of your use of the computer in gaining or producing your assessable income over four years.