Private ruling: Investment deductions
Date of advice: 1 March 2016
Published: April 2016
Ruling period: Year ended 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Q1: Are you entitled to a deduction for the purchase of an Investment Combo package? | A1: No. | Q2: Are you entitled to claim decline in value of the software component of the package? | A2: Yes.

Relevant facts and circumstances: You purchased an Investment Combo package ('the Package'). The Package included: • trading software • analysis and research reports • ongoing support including one on one mentoring Prior to purchasing the Package you had • invested in a diversified managed investment portfolio • subscribed to the Australia stock report • purchased and sold one parcel of shares using an e-trade account. After purchasing the Package you bought and sold shares in multiple companies.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 8-1 | Income Tax Assessment Act 1997 Subsection 40-95(7)

Reasons for decision: Detailed Reasoning - Share trading activities: In order to ascertain whether the income received from, and any loss incurred in, the sale of shares is either assessable or deducible, it is necessary to first determine whether a taxpayer was carrying on their share trading activity as a business or whether the shares were are held as an investment. In the 20XX-YY financial year you purchased and sold shares in multiple companies with a total investment of $XX. Based on the number of transactions and capital involved your activities for the 20XX-YY financial year are considered to be that of a share investor rather than a person in the business of share trading. The expenses that are the subject of this private ruling will therefore be considered below in earning your assessable income as a share investor. | Detailed Reasoning - Deduction for the purchase of the Package: 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 of domestic nature, or relate to the earning of exempt income. The courts have considered the meaning of 'incurred in gaining or producing assessable income'. In Ronpibon Tin NL & Tong Kah compound NL v. Federal Commissioner of Taxation (1949) 78 CLR 47; (149) 4 AITR 236; (1949) 8ATD 431 the High Court stated that: For expenditure to form an allowable deduction as an outgoing incurred in gaining or producing 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. Taxation Determination TD 95/60 states that expenditure on setting up an investment portfolio or commencing share trading activities is incidental and relevant to outlaying the price of acquiring the investment, and so is associated with the making of the investment as to warrant the conclusion that it is capital or capital in nature. The purchase of the Package is considered to be similar to that of an outlay to set up an investment portfolio. The Package has provided you with a structure on which to base investment decisions in relation to the purchase and sale of shares. As prior to purchasing the Package you had only purchased and sold one parcel of shares, it is considered the purchase of the Package was incurred at a point too soon to be related to the production of assessable income. Therefore, the purchase price of the Package is not an allowable deduction. | Detailed Reasoning - Decline in value for the trading software: Included in the Package is a software program used for share trading purposes. Share trading software used for the purpose of obtaining assessable income is considered deductible. However you will not be entitled to claim an outright deduction for the share trading software under section 8-1 of the ITAA 1997. The reason is that expenditure on the purchase of the software is considered to be of a capital nature. Division 40 of the ITAA 1997 however 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 four years (a rate of 25%). This rate and method is prescribed by the ITAA 1997 and is the only rate available for calculating the decline in value for software expenditure (subsection 40-95(7) of ITAA 1997). Therefore, you will be entitled to claim a deduction for the decline in using the following formula: Cost attributable to trading software * (days owned/365) * 25%