Private ruling: Rental Expenses - Mentoring program
Date of advice: 12 February 2016
Published: April 2016
Ruling period: Year ending 30 June 20ZZ
Date scheme commenced: 1 July 20YY

Ruling: Q1: Are you entitled to claim a deduction for coaching time spent assessing the returns on the existing property? | A1: Yes. | Q2: Are you entitled to claim a deduction for the monthly seminar content that was organised around revenue items? | A2: Yes | Q3: Are you entitled to claim a deduction for mentoring fees as borrowing expenses to arrange finance for a new investment property? | A3: No

Relevant facts and circumstances: You purchased a rental property in 20XX. You enrolled in a mentoring program in 20YY in relation to rental property investment. You commenced making regular payments for the cost of the program. You have purchased another investment property since beginning the mentoring program. You have a rental property agent. The mentoring program provides: • An assigned coach - who assesses your goals and objectives and works with you to find a suitable investment strategy to meet your goals. • Access to various property investment educational resources. • Monthly seminars - provides education on various aspects of property investing. • Assistance with arranging finance. Coaching Time At least ten mentoring meetings were held in the first year of the mentoring program. The meetings were held on average for duration of one hour. The first two meetings were focussed on the existing rental property with the topics discussed including: • Negotiating a reduced interest rate with the bank • The performance of the real estate agent • How to increase the rental yield of the property. Mentoring meetings Two full meetings were spent working through finance strategies with a focus on ensuring that the debt was structured appropriately to enable more properties to be purchased. This was to avoid cross securitisation and to ensure that personal loans were not mixed with investment loans. Monthly Seminars There are more than 10 x two hour sessions for the year. A total of 20 plus hours of monthly seminars. Specific sessions oriented around existing properties include: • Presentation on property depreciation which covered the rationale behind depreciation, the cashflow impact of depreciation and the importance of distinguishing initial repairs from repairs after rental has commenced. This seminar went through a number of examples of improvements and how they are treated for depreciation purposes and also taught clients what records need to be kept. • Presentation on improving rental yields by renovating. This session explored how to assess the costs of renovating vs the potential returns that could be achieved and explored strategies that could be used in key areas of the property to make it more appealing to tenants e.g. bathrooms, kitchens etc. At this session experienced investors provided details of successes and failures in this area. • Presentation on managing your agent. This session explored common failings of agents, how to select a good one & what to do if you are having problems with your agent. Investors shared their experiences with problems with agents and what they did to overcome them. • Forum discussing how to bring your interest rates down by both direct negotiation with banks and or by refinancing. This session included information on assessing the cost of refinancing to make sure that investors ensure that a refinance results in actual savings once borrowing costs are taken into account. You have improved your property rental yield by implementing a number of renovations, negotiated with your bank to reduce interest and established a depreciation schedule to increase available deductions. Since beginning the program you have developed an investment strategy. You are seeking to claim the following: • x% of the coaching time - calculated by spending the first x minutes of each session; which was spent on the following: • Assessing your returns on the existing property. • Assessing how income could be improved. • Providing guidance as well as coaching on implementing improvements. • Managing and assessing tenants. • x% of the monthly seminar content - which was spent on the following: • Selecting and managing tenants. • Managing agents. • Dealing with rental tribunals. • Determining how much should be spent on renovations to increase rent. • Monitoring rental and interest rate markets to maximise yield. • x% of the mentoring fees as borrowing expenses - which were spent on the following: • How to arrange finance for a new investment property. • How to ensure equity could be release from existing investments. • How to ensure that the loan structure was appropriate. • That the deductibility of interest was maintained and investment loans were not blended with private loans.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 8-1

Reasons for decision: Summary: Subsection 8-1(1) of the ITAA 1997 allows a deduction for any loss or outgoing to the extent that it is incurred in gaining or producing assessable income, or is necessarily incurred in carrying on a business for the purpose of producing assessable income. Subsection 8-1(2) of the ITAA 1997 however, excludes a loss or outgoing of a capital, private or domestic nature, or where the loss or outgoing is incurred in gaining or producing exempt income. For a deduction to be allowed under the first limb of subsection 8-1(1) of the ITAA 1997, the expenditure must be incidental and relevant in the sense of having the essential character of expenditure incurred in the course of gaining or producing assessable income. There must be a sufficient connection between the expense and the operations or activities which gain or produce the assessable income. Refer the judgement of Lockhart J in Federal Commissioner of Taxation v. Cooper (1991) 29 FCR 177; 91 ATC 4396; (1991) 21 ATR 1616. In this case, a significant proportion of the content of the mentoring program related to future property investment. As such the primary purpose of the program was to give you the required knowledge to establish a strategy or structure for investing in rental properties. The proportion of the cost of the seminar that relates to this primary purpose is incurred at a point too soon to be incidental and relevant to the your income earning activities from any future investment properties (Federal Commissioner of Taxation v. Maddalena 71 ATC 4161; (1971) 2 ATR 541). There is insufficient connection between this expense and the earning of rental income from current investment properties. This expenditure does not have the essential character of expenditure incurred in gaining or producing assessable income. Accordingly, as this expenditure is not incurred in gaining or producing assessable income no deduction is allowable under subsection 8-1(1) of the ITAA 1997. The proportion of the cost of the mentoring program that dealt with the management of the current rental property and maximizing the income from that investment is incidental and relevant to the taxpayer's current income earning activities and therefore is deductible under section 8-1 of the ITAA 1997. In establishing this connection the taxpayer was able to point to how they intend to reduce their rental expenses as a result of the information they gained from the mentoring program. There must be a reasonable basis for the apportionment of the total cost between deductible and non-deductible components. | Detailed Reasoning - Application to your circumstances: Deductibility of the coaching time The first two meetings were focussed on the existing rental property. This dealt with the management of the current rental property and maximizing the income from that investment. This is incidental and relevant to the taxpayer's current income earning activities. These two meetings comprised two hours out of the total of ten hours of coaching meetings conducted. Accordingly a deduction for 20% of the total cost in the coaching time of the mentoring program is allowable under subsection 8-1(1) of the ITAA 1997. Deductibility of the seminar content The seminars conducted covered a number of topics relevant to the current rental property including depreciation, improving property yields, renovations, managing your agent and refinancing. These seminars are relevant to the taxpayer's current income earning activities. These seminars comprised x hours out of the total of 20 plus hours of coaching meetings conducted. Accordingly a deduction for x% of the total cost in the coaching time of the mentoring program is allowable under subsection 8-1(1) of the ITAA 1997. Deductibility of the mentoring fees In your case you have incurred fees relating to a mentoring program on how to arrange finance for a new investment property. This portion of the cost of the mentoring program that relates to this purpose is incurred at a point too soon to be incidental and relevant to the your income earning activities from any future investment properties There is insufficient connection between this expense and the earning of rental income from your current investment property. Accordingly a deduction for 15% of the total cost of the mentoring fees of the mentoring program is not allowable under subsection 8-1(1) of the ITAA 1997.