Edited version of your written advice

Authorisation Number: 1051187092470

Date of advice: 7 February 2017

Ruling

Subject: Rental property deductions

Question

Can you claim a deduction for the cost of a subscription paid for a real estate mentoring program?

Answer:

No

This ruling applies for the following period

Year ended 30 June 20xx

The scheme commenced on

1 July 20xx

Relevant facts

You have a full-time job and also own a number of rental properties as investments.

You have purchased a subscription to a real estate investment mentoring program.

The total cost of the subscription is $xx xxx with regular instalments of $xxx paid monthly commencing DDMMYY.

This subscription has been purchased with the intent of learning how to increase your rental returns within your current portfolio and also to increase returns from future investments.

You currently own a number of rental properties and have found the program to be useful in educating you in ways to ensure the properties have a positive cash flow impact.

Due to the learning you have undertaken, you learnt of the importance of positively gearing your investment properties and as a consequence sold one property that was negatively geared to purchase a property that has the potential to be positively geared.

You are also learning about the tax consequence of repairs.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Reasons for decision

Detailed reasoning
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, relate to the earning of exempt income or are excluded by another provision of the taxation legislation.

The courts have considered the meaning of 'incurred in gaining or producing assessable income'. In Ronpibon Tin NL and Tong Kah Compound NL v. Federal Commissioner of Taxation (1949) 78 CLR 47; (1949) 56 ALR 785; (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.

It is a long standing principle that a taxpayer does not satisfy section 8-1 of the ITAA 1997 merely by demonstrating a casual connection between the expenditure and the derivation of income. What must be shown is a closer and more immediate connection. The expenditure must be incurred in gaining or producing your assessable income (Lunney v Commissioner of Taxation (1958) 100 CLR 478). These principles have been affirmed by the High Court in Commissioner of Taxation v Payne HCA 3.

Capital expenses

An expense will usually be capital in nature where it is incurred with the intention to create an asset or advantage of a lasting and enduring nature (British Insulated and Helsby Cables Ltd v. Atherton (1926) AC 205; (1926) 10 TC 155).

Capital expenditure often produces an enduring benefit, that is, the structure of the advantage or asset. Revenue expenditure is often repetitious or recurring in nature and often does not produce assets or advantages of an enduring nature.

Deductibility

Your subscription entitles you to ongoing access to mentoring workshops and to the home study material.

The classic formulation of the matters to be considered in determining whether a loss or outgoing is of a capital or revenue nature is that of Dixon J in Sun Newspapers Ltd v. Federal Commissioner of Taxation (1938) 61 CLR 337; (1938) 5 ATD 87; (1938) 1 AITR 403 where his Honour said:

There are, I think, three matters to be considered, (a) the character of the advantage sought, and in this its lasting qualities may play a part, (b) the manner in which it is to be used, relied upon or enjoyed, and in this and under the former head recurrence may play its part, and (c) the means adopted to obtain it; that is, by providing a periodical reward or outlay to cover its use or enjoyment for periods commensurate with the payment or by making a final provision or payment so as to secure future use or enjoyment.

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 (Maddalena's case)). 

Similarly expenditure on setting up an investment portfolio to purchase properties is incidental and relevant to outlaying the price of acquiring the investment (e.g., the property) or the setting up of a business. The expenditure is incurred at a point too soon for a deduction to be allowed.

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

In your case, you have attended a program to increase your skills and knowledge of investing in property with the aim of building up an investment property portfolio. We acknowledge that property management seminars may provide some benefit to you in understanding how to manage an investment property and the purchasing of new properties. However if a course of study is too general in terms of the taxpayer's current earning activities, or is undertaken at point to soon, the necessary connection between the self-education expenses and the income earning activity do not exist.

Your subscription fees incurred are too general and at a point too soon to be regarded as being incurred in the course of earning your assessable income and are capital in nature. Therefore, the expenses in relation to the Quantum Shift Program are not an allowable deduction under section 8-1 of the ITAA 1997.