Edited version of your private ruling

Authorisation Number: 1012533261322

Ruling

Subject: Book-keeping fees

Question

Are you entitled to a deduction for the fees paid to your relation?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 2014

The scheme commenced on

1 July 2013

Relevant facts

You have carried forward capital losses on your share investments and have decided you need some help.

You wish to engage the services of a book-keeper to improve your record-keeping and performance of your investments.

In the 2012-13 income year you had dividend income and rental income.

You intend to procure book-keeping services from your relation who is a sole trader.

Your relation would monitor your investments and advise if they are going up or down. Your relation would also keep records on transactions throughout the month and record all expenses and dividends. Your relation is not a broker and would not advise you when to buy or sell your shares.

You are not registered for GST.

You will pay your relation an amount per month. Your relation will work between ½ day and 1½ days each week.

Quarterly progressive payments will be made upon demonstration of adequate records having been kept in relevant spreadsheets. Your relation is responsible for rectifying any defects in the work without charging any more money.

Your relation has qualifications in another field. Your relation has office experience.

Your relation does not provide other clients with book-keeping services. Your relation is also hoping to develop a website to provide an income in the future. Your relation has no other income at this point. Your relation is working on a business plan.

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 except where the outgoings are of a capital, private or domestic nature.

A number of significant court decisions have determined that for an expense to be an allowable deduction:

· 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. FC of T; (1958) 100 CLR 478 (Lunney's case)),

· 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 NL v. FC of T, (1949) 78 CLR 47), 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 (Charles Moore Co (WA) Pty Ltd v.

FC of T, (1956) 95 CLR 344; FC of T v. Hatchett, 71 ATC 4184).

As outlined in Taxation Determination TD 95/60, an ongoing management fee paid to investment advisers, or costs of servicing and managing an existing investment portfolio are generally an allowable deduction under section 8-1 of the ITAA 1997 if they relate sufficiently to the gaining or producing of assessable income and are not capital or private in nature.

In your case, your relation is not an investment adviser and does not advise on what investments to buy or sell. As the ongoing fees paid to your relation are not in relation to the active management of your investment portfolio, the fees are not regarded as being costs of servicing and managing your investments.

The courts have addressed issues where a person pays another person for services.

In Case M55 80 ATC 366; (1980) 24 CTBR (NS) Case 30 (Case M55), an employee pathologist was denied a deduction for wages paid to his wife to take messages for him when he was on call. The Board considered that the expenditure was not incurred in gaining or producing the assessable income and was of a private or domestic nature. Dr Beck stated at ATC page 368, CTBR (NS) page 242 that:

If an employee pays another party to render some of the services for which the employee is paid, this expenditure is not a cost of deriving the income. It can be regarded as a cost of lightening the work load, of gaining time off, of filling a gap in the employees competence, or, perhaps of rendering service beyond that which he is being paid for, and all expenditure of this kind is private and hence specifically excluded ...[from being deductible]

In Case S84 85 ATC 618, the taxpayer was a relieving magistrate. He paid his wife to undertake secretarial duties, principally answering the phone, whilst he was travelling as a relieving magistrate between different venues. It was agreed that his wife performed the duties however the claim was disallowed on the grounds that it was essentially expenditure of a private or domestic nature unrelated to the derivation of the taxpayer's income.

Although the above cases relate to employees, the principles are relevant in your circumstances.

In your case, your dividend income is not related to the success of your book-keeper. That is, the amount of assessable dividend income received is not increased by the services of your book-keeper. The expense of you having a book-keeper is a voluntary payment not directly incurred in the derivation of your investment income.

The arrangement and associated expenses are private in nature. You are not entitled to a deduction for expenses in relation to the fees paid. As in Case M55, the payments for a book-keeper are not made in deriving your assessable income. Your need for assistance arises from your personal situation, albeit in connection with improving your record keeping. The expenses incurred are not sufficiently connected to the gaining or producing of your assessable income. Therefore no deduction for a book-keeper is allowable under section 8-1 of the ITAA 1997.