Edited version of your private ruling

Authorisation Number: 1012599352344

Ruling

Subject: Computer expenses

Question 1

Is the work related portion of protection expenses incurred for your iPad, iPhone and laptop an allowable deduction?

Answer

Yes.

Question 2

Are you entitled to a deduction for the cost of a consultant for the initial consultation and to advise you on the design and purchase options in relation to your iPad, iPhone, laptop, computer and Telstra service and data and IT and ordering equipment?

Answer

No.

Question 3

Are you entitled to a general deduction for the work related portion of the installation of your computer by the consultant?

Answer

No.

Question 4

Do the costs of installation of your computer form part of the cost of the computer for depreciation purposes?

Answer

Yes.

Question 5

Are you entitled to a deduction for costs incurred for a consultant to set up your computer, related devices, equipment and services?

Answer

No.

This ruling applies for the following period

Year ended 30 June 2013

The scheme commenced on

1 July 2012

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,

• additional information including invoices, and

• emails received early March 2014.

You are a professional and use your computer for work related purposes.

You purchased protection and data insurance for all your devices.

You engaged a computer specialist consultant to advise you and assist with the purchase, installation and setup of equipment and software. The costs include various options, including tuition, ordering equipment, installation, demonstrations, set up and software installation.

The program related to the electrical circuitry drawing prepared for your electrician for the electrical work to be done for your computer network.

The equipment and insurance is in your name only. You are the only user of the equipment.

They are also used for private purposes.

You have receipts for the expenses incurred. You have not kept a diary for a month to show your work related use.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1.

Income Tax Assessment Act 1997 Division 40.

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, or relate to the earning of exempt income, or a provision of the ITAA 1997 prevents it.

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, 

• 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).

A deduction is only allowable if an expense:

n is actually incurred,

n meets the deductibility tests, and

n satisfies the substantiation rules.

A deduction is allowable for the cost of insurance of equipment to the extent of its work related use.

As you use your equipment for work related purposes, the relevant portion is an allowable deduction; however the relevant substantiation needs to be met.

Where equipment is used for private purposes as well as work related purposes, it is necessary to apportion the expenses to determine the work related use. Generally, work-related use can be determined from a diary showing the hours the equipment was used for work related purposes and the hours used for personal use.

Apportionment is a question of fact and involves a determination of the proportion of the expenditure that is attributable to deductible purposes. The Commissioner believes that the method of apportionment must be fair and reasonable in all the circumstances.

Although the original invoice shows the total cost, you also need records to show your work related use. 

For future years, please ensure you keep a one month diary to show your work related usage. Where the necessary substantiation requirements have not been met, no deduction is allowable..

Depreciating assets

A deduction is not allowable under section 8-1 of the ITAA 1997 for the cost of equipment as it is considered to be a capital expense.

However, a deduction is available under Division 40 of the ITAA 1997 for depreciation of a depreciating asset which is used during the income year for the purpose of producing assessable income. A computer is a depreciating asset for Division 40 purposes.

The cost of a depreciating asset includes an amount paid in relation to starting to hold the asset and includes the purchase price. The cost of a depreciating asset also includes the cost of installation.

The costs relating to the installation of the computer and the network platform form part of the cost of your computer for depreciation purposes.

The cost of setting up your laptop forms part of its cost for depreciation purposes.

Consultant expenses

Fees for advice in relation to purchasing a computer and other equipment are not deductible because it is not expenditure incurred in the course of gaining or producing the assessable income. It is too early in time to be an expense that is part of the income producing process. Therefore the expenses have an insufficient connection with earning your assessable income, and are considered capital in nature.

The costs relating to the initial consultation meeting, site inspection, specification review, system design options, and the various setting up of your programs, tuition and are not sufficiently connected to your income earning activities and are not an allowable deduction.