Edited version of private advice

Authorisation Number: 1052313273602

Date of advice: 04 October 2024

Ruling

Subject: Deduction

Question 1

Are you entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for money spent on the Trading software?

Answer 1

No

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You received a call from a sales representative of Company A to buy Trading software. During the phone conversation the sales representatives promised you high returns.

Company A offered you a trial of the software for a specified amount. During the trial period the sales representatives would phone you every day and pressure you to buy the software.

On a specified date you entered into an agreement with Company A to purchase the software. You transferred the money to pay for the software and provided us with details on the date of the transfer and the amount.

You provided us with the purchase agreement which includes lifetime agreement clause, risks involved and no promise of a return.

You engaged Broker A as your broker who was recommended to you as a broker by Company A.

You purchased a software upgrade and provided us with details of the date and amount. Although you were promised a contract, you never received it.

You traded using the software for a 6 month period, and your trading statements show consistent losses.

You were then advised that you would be required to pay a subscription fee of a specified amount. You are unsure if it was to be on either a weekly or monthly basis as at this point you decided to stop trading.

You attempted to contact Company A, but they did not return your calls.

Although you have experience in XX trading, you have no experience in XX trading. Previously, you had a personal Brokerage Account in a specified year.

You did not report the incident to the police or any other Australian Government Department, except for calling ASIC. ASIC advised you to google it. You didn't want to take the matter to court, as you believed you would struggle to fight the case against Company A.

You provided us with a copy of your bank statement which shows the payments you made to Company A and Broker A.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 paragraph 8-1(2)(a)

Income Tax Assessment Act 1997 Division 40

Income Tax Assessment Act 1997 section 40-25

Income Tax Assessment Act 1997 subsection 40-25(7)

Income Tax Assessment Act 1997 subsection 40-30(1)

Income Tax Assessment Act 1997 subsection 40-60(2)

Reasons for decision

Summary

The money that you spent to purchase the Trading software is not deductible because it is capital in nature and you are precluded from claiming a deduction under paragraph 8-1(2)(a). However, you are eligible for a deduction under decline in value.

Detailed reasoning

To determine if you can claim an immediate deduction for the cost of the software in the relevant financial year, we need to consider section 8-1 of the ITAA 1997. Generally, under section 8-1, you can deduct expenses to the extent that they are incurred in gaining or producing your assessable income to the extent that:

•                     the outgoing in incurred in gaining or producing your assessable income

•                     there is the relevant nexus between the loss or outgoing and the carrying on of a business for the purpose of gaining or producing assessable income

•                     the outgoing is not of a capital nature or domestic nature.

An expense will usually be capital in nature where it is incurred with the intention of creating an asset or advantage of a lasting and enduring nature (British Insulated & Helsby Cables Ltd v Atherton [1926] A.C. 205).

Any assets or set of assets that cost $XX or more, the decline in value of the asset is be claimed over time under Division 40 of the ITAA 1997. A depreciating asset is an 'an asset that has a limited effective life and be reasonably expected to decline in value over time' (subsection 40-30(1) of the ITAA 1997). Section 40-25 of the ITAA 1997 allows you to deduct an amount equal to the decline in value for a financial year of a depreciating asset that you held for any time during the year to the extent that it waws used for a taxable purpose. A taxable purpose includes the purpose of producing assessable income (subsection 40-25(7) of the ITAA 1997). It starts to decline from its start time. 'The start time of a depreciating asset is when you first use it, or have it installed ready for use for any purpose' (subsection 40-60(2) of the ITAA 1997).

In your case, you paid for and received the Trading software for the purpose of generating income for your investment activities. You commenced using the software for a taxable purpose in a specified financial year, however you made an overall loss from your investment activities. When investing it comes with a risk associated with it that there is no guarantee is making a profit which was outlined in your contract with Company A. The expenditure you incurred on the purchase of the software package falls within the definition of capital in nature, therefore you will not be entitled to claim an immediate deduction for the software cost under section 8-1 of the ITAA 1997.

However, Division 40 of the ITAA 1997 allows a decline in value (depreciation) deduction on software used in gaining assessable income. The deduction is calculated using the prime cost method with an effective life of 5 years (that is, a rate of 20%). This rate and method are prescribed by the ITAA 1997 and is the only rate available for calculating decline in value for software expenditure.

The following formula is used to work out your decline in value:

Software Decline in Value = (Cost x Days Owned x 0.20) / 365

As you ceased using the software in the financial year following the purchase as it was not fit for the intended purpose in generating income you will be able to deduct the reminder of the cost of the software in the following financial year.