Private ruling: Deductions against non-business income
Date of advice: 9 August 2019
Published: October 2019
Ruling period: 1 July 2018 to 30 June 2019 | 1 July 2019 to 30 June 2020 | 1 July 2020 to 30 June 2021 | 1 July 2021 to 30 June 2022 | 1 July 2022 to 30 June 2023 | 1 July 2023 to 30 June 2024 | 1 July 2024 to 30 June 2025
Date scheme commenced: 27 March 2019

Ruling: Q1: Are you entitled to claim the premium payable for Professional Indemnity Insurance as a deduction during the runoff period? | A1: Yes | Q2: Are you entitled to claim a deduction Antivirus software against non-business income? | A2: No | Q3: Are you entitled to claim a deduction for law society practising certificate fees against tax payable on non-business income? | A3: No

Relevant facts and circumstances: You were employed full time until your retirement. During that time the X paid your Y fees each year. Subsequent to that you did part time work as a Z on contract to the X and established a small business for that purpose. You closed the business and ceased on 30 June 20XX. The gross income from that business did not exceed $X in any year and in the 20XX-XX financial year the gross income was less than $X. You were not registered for Goods & Services Tax. Appropriate deductions were claimed during that period. Over the X years you were required to enter into a Service Agreement which introduced the requirement set down by the B that you take out Professional Indemnity Insurance, which was obtained from the C. A deduction was claimed for the premium each year that it was paid. The premiums were less than $X each year. You were advised to enter into runoff cover offered by the C for the next X years to cover you for any claim that may be made since you stopped your services, but for any alleged incidents that occurred while you were conducting these services. It was advised that each year the premium will reduce during the X years runoff and the initial amount was $X. This was paid in XXXX 20XX. Your other income is an untaxed superannuation stream. You also hold a small number of shares. For your personal computer you have word processing. You also have antivirus software to ensure your computer is security protected. You used XYZ to prepare this private ruling application. You have been informed by the D that if you wish to witness documents or certify documents that you are required to continue to have a E. You currently do not and will not derive any income from such activity or practice in your field in the future. You do not pay for membership of the D of F and are exempt from mandatory continuing education on your undertaking not to practice in your previous specialisation. The annual certificate fees are about $X.

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

Reasons for decision: Summary: 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 your assessable income or are necessarily incurred in carrying on a business for the purpose of gaining or producing your 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 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). Generally, business expenses incurred for income producing purposes are deductible under section 8-1 of the ITAA 1997, to the extent that it is not capital, private or domestic in nature. The essential character of the expense is a question of fact to be determined by reference to all the circumstances. In Taxation Ruling TR 2004/4 Income tax: deductions for interest incurred prior to the commencement of, or following the cessation of, relevant income earning activities a deduction is allowable for interest incurred after the business ceased in respect of a recurrent liability for interest. This was the approach that had been followed from AGC (Advances) Ltd v. FC of T 75 ATC 4057; (1975) 5 ATR 243 and Placer Pacific Management Pty Limited v. FC of T (1995) 95 ATC 4459; (1995) 31 ATR 253. | Detailed Reasoning - Runoff Insurance: To protect yourself from potential future legal action for services performed by your business you obtained runoff insurance for X years. A deduction is allowable as the need for the expense arose out of the previous business operations. | Detailed Reasoning - Computer Software: The expense incurred for XYZ and antivirus protection is not related to gaining or producing your assessable income or incurred in carrying on a business for the purpose of gaining or producing your assessable income. You ceased practicing as a Q in 2004 and ceased your business as a R on 30 XXXX 20XX. You do not and will not gain future assessable income from your past activities and there is no correlation with incurring these expenses to the production of assessable income or business income. A deduction is not allowed under section 8-1 of the ITAA 1997 for XYZ and antivirus protection as they are personal in nature. | Detailed Reasoning - Legal Practicing Certificate: Paragraph 8 of Taxation Ruling TR 2000/7 Income tax: subscriptions, joining fees, levies and contributions paid to associations by individuals states: A deduction is not allowable under section 8-1 of the Act for subscriptions paid to an association where the person is retired from (or does not otherwise earn assessable income from) the particular trade, business or profession. Furthermore, a deduction under section 8-1 of the Act is not allowable to the extent to which the subscription relates to a person's activities which produce exempt income. Paragraph 9 of TR 2000/7 allows a deduction under section 25-55 of the ITAA 1997 up to $42 in an income year in respect of payments to an association that an individual belongs, if unable to meet the requirements of section 8-1 of the ITAA 1997. With mention to the above cessation dates as a Q and a R, the expense incurred for your Y is not an allowable deduction for the 20XX-XX financial year and onwards under section 8-1 of the ITAA 1997. Where the holding of the certificate was mandatory for previous years in order to operate as a Q and/or R, the deduction was allowable. For the 20XX-XX financial year and onwards if the membership is held, a deduction up to $42 per year is allowable under section under section 25-55 of the ITAA 1997.