Edited version of private advice

Authorisation Number: 1012676692387

Ruling

Subject: Property investment

Question 1

Are you entitled to a deduction for the expenses incurred for a property investment club membership?

Answer

No.

Question 2

Are you entitled to a deduction for subscriptions to property investment magazines?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 2012

Year ended 30 June 2013

Year ended 30 June 2014

The scheme commenced on

1 December 2011

Relevant facts

You currently own investment properties which are rented and used for income producing purposes. The properties are managed by a real estate agent.

You have become a member of an investment club. This investment club educates you in the specific field of property investment through information classes which helps guide your choices in buying. It also offers properties to buy for investment and provides one-on-one investment advice specific to property and your situation and goals. The club also provides information on depreciation and other tax related information.

You have a payment plan to pay the membership fee.

You also subscribe to property investment magazines which provide information on when and where to buy properties and the potential yield from investments.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1.

Reasons for decision

Allowable deductions

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.

A number of significant court decisions have determined that, for an expense to satisfy the tests outlined in 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 (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),

• 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 (Hatchett's case).

In determining whether a deduction for your club membership is allowed under section 8-1 of the ITAA 1997, the nature of the expenditure must be considered (Hallstroms Pty Ltd v. Federal Commissioner of Taxation (1946) 72 CLR 634; [1946] HCA 34; (1946) 3 AITR 436; (1946) 8 ATD 190). The nature or character of the membership follows the advantage that is sought to be gained by incurring the expense. If the advantage to be gained is of a capital or private nature, then the expenses incurred in gaining the advantage will also be of a capital or private nature.

The following guidelines for determining whether a loss or outgoing is of a capital nature have been set down by the High Court in Sun Newspapers Ltd. and Associated Newspapers Ltd. v. Federal Commissioner of Taxation (1938) 5 ATD 23; 5 ATD 87; 61 CLR 337: 

• the expenditure is related to the business structure itself, that is, the establishment, replacement or enlargement of the profit yielding structure rather than the money earning process, or

• the nature of the advantage has lasting and enduring benefit, or

• the payment is 'once and for all' for the future use of the asset or advantage rather than being recurrent and ongoing.

That is, where the expenditure is incurred for the purpose of securing an enduring benefit, rather than a revenue purpose, the expenditure is capital in nature and is not deductible.

In your case the property investment membership is a one off payment that provides you with enduring life membership benefits and does not directly relate to the deriving of your current rental income from your existing investment properties. Although you have a payment arrangement in relation to your membership, the payment is regarded as a once and for all cost.

The membership fee cannot be described as a revenue expense incurred in earning your assessable income. Rather the expense is capital in nature and directed more to potential future benefits and future investment properties. Accordingly, you are not entitled to a deduction for the membership costs under section 8-1 of the ITAA 1997.

Self-education expenses

The deductibility of self-education and training expenses fall for consideration under section 8-1 of the ITAA 1997.

Taxation Ruling TR 98/9 Income tax: deductibility of self-education expenses incurred by an employee or a person in business discusses the circumstances under which self-education expenses are allowable as a deduction. A deduction is allowable for self-education expenses 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 (Federal Commissioner of Taxation v. Finn (1961) 106 CLR 60, (1961) 12 ATD 348).

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, TR 98/9 states that 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). The expenses are incurred at a point too soon to be regarded as incurred in gaining or producing assessable income. They are incurred in getting, not in doing, the work which produces the income (High Court decision in FC of T v. Maddalena 71 ATC 4161; (1971) 2 ATR 541).

Paragraph 42 of TR 98/9 states that if a course of study is too general in terms of the taxpayer's current income earning activities, the necessary connection between the self-education expense and the income earning activity does not exist.

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? deals with the issue of whether fees paid for obtaining investment advice are an allowable deduction for taxpayers who are not carrying on an investment business.

TD 95/60 explains that a fee for drawing up a financial plan is not deductible because it is not expenditure incurred in the course of gaining or producing the assessable income from the investments. It is too early in time to be an expense that is part of the income producing process as it is an expense that is associated with putting the income earning investments in place. Therefore the expense has an insufficient connection with earning income from the investments, and is considered capital in nature.

TD 95/60 also states that where a taxpayer has existing investments and goes to an investment advisor to draw up an investment plan, the fee paid would be a capital outlay even if some or all of the pre-existing investments were maintained as part of the plan. The character of the outgoing is not altered because the existing investments fit in with the plan. It is still an outgoing of a capital nature.

Although TR 98/9 and TD 95/60 do not directly address your circumstances, the principles outlined are relevant.

The membership provides information on property investment and how to build a property portfolio. Although you may acquire some knowledge on depreciation and other tax matters, it is not considered that the membership is directly related to your current investment properties and rental income.

While the membership may assist you with your financial choices and investment knowledge, the expenses incurred in acquiring this knowledge are not expenses incurred in gaining your assessable income. The membership relates more to your future financial success. That is, the membership provides you with knowledge and tips for future investments and wealth. Although you may receive increased investment income in the future, the membership does not relate sufficiently to servicing your existing investments. The expenditure is incurred at a point too soon to be incidental and relevant to your income earning activities.

The membership is too general in terms of your current income earning activities and the associated costs do not have a sufficient nexus to the derivation of your current assessable income. Furthermore, the benefits are largely capital in nature. Therefore the expenses are not deductible under subsection 8-1 of the ITAA 1997.

Magazines

The cost of magazines is regarded as a private expense. Even though you may be able to use part of the information in relation to your investment properties, the benefit gained is considered to be remote and the proportion of the expense that relates directly to your assessable rental income is incidental to the private expenditure. This view is supported in Case P30 82 ATC 139 and Case P114 82 ATC 586.

Therefore you are not entitled to a deduction for your magazine subscriptions or other property investment magazines as they are regarded as private in nature and not sufficiently related to your assessable income.