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PETROVIC v FC of T
2005 ATC 2169
Judges:
BH Pascoe SM
Court:
Administrative Appeals Tribunal
MEDIA NEUTRAL CITATION: [2005] AATA 416
Judgment date: 3 May 2005
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BH Pascoe (Senior Member): These applications are for review of decisions of the respondent to disallow objections to amended assessments of income tax for the years ended 30 June 2002 and 30 June 2003. The objections were to the disallowance of deductions claimed of $31,256 in the 2002 year and $5,500 in the 2003 year.
2. At the hearing the applicant, Dragan Petrovic, was represented by Mr P. McMahon, an accountant and the respondent was represented by Ms H. Riley of counsel. Evidence was given by Mr Petrovic.
3. The expenditure claimed as deductions by Mr Petrovic arose primarily from his attendance at seminars arranged by entities associated with Mr Henry Kaye. The details of this expenditure were:
Year ended 30 June 2002
Investment Mastery Seminar 15,215
Mezzanine Finance Seminar 8,795
Accommodation during Seminar 316
Motor vehicle expenses — attending Seminar 600
Subscription weekly E. Property Report 895
Purchase of Home Price Guide 100
Depreciation of cameras and Renovation Guide Library 290
Repairs — video camera 256
Batteries — video camera 124
Property investment retainer fee 4,665
——
31,256
——
Year ended 30 June 2003
Investment registration fee 5,500
——
4. Mr Petrovic said that he had been employed as an engineer from February 1989 until he was retrenched in March 2003. He had been aware of the likely retrenchment for some time prior to March 2003 and was concerned at the prospect of achieving an adequate income in the future. In September 1999 he purchased a rental property in Strathmore jointly with his wife. The property was tenanted by the one tenant from October 2000 to March 2003, when he was able to evict the tenant for non-payment of some $3,000 of rent. The rental during this period varied from $170 per week to $180 per week. After repairs to the property, a new tenant was found in August 2003.
5. In 1991 Mr Petrovic and his wife purchased a residence in Oak Park. In July 2001 they purchased a vacant block of land in Oak Park for approximately $162,500 and sold it in March 2003 for $170,000. In July 2002 Mr Petrovic purchased a commercial office suite in Camberwell. The vendor provided a rental guarantee until July 2004, although no tenant occupied the offices during that period. A tenant was found from July 2004. The only other investment in the period was a managed fund into which contributions had been made monthly and which was redeemed in July 2001 for approximately $7,000.
6. Mr Petrovic said that he signed up for the seminars as he wished to extend his property investments and increase income from rentals. The Investment Mastery Seminar was in three modules with the first in September 2001, described as “Property Genius”, the second in Sydney for four days in October 2001 described as “Investment Mastery” and the third in Melbourne in February 2002, described as “Multi Speaker”. Mr Petrovic said that the seminars dealt with finding and dealing with tenants, increasing rental income, financing property, insurance, renovation, locating properties to purchase, etc. The Mezzanine Finance Seminar was a three-day seminar, said to “provide students with strategies and methodologies to invest in mezzanine mortgage funding while minimising their exposure to risk”. From the evidence of Mr Petrovic, it would appear that “mezzanine” mortgages are another name for second mortgages with property developers. Mr Petrovic said that he had utilised the information gained at this seminar to obtain second mortgage finance for the purchase of the Camberwell commercial property. He maintained that he could not have settled without that finance facility. He did not explain how he had intended to finance the settlement when he signed the contract, some nine days prior to attending the seminar.
7. Mr Petrovic said that the E-Property Report and the Home Price Guide were useful for comparison of property values. Depreciation was claimed on a digital camera and video camera purchased on the advice of the seminar organisers and said to be for use in photographing prospective properties and to record conditions of rented property prior to and after occupancy by a tenant. It was conceded that replacement batteries and repairs in relation to an older video camera, which had been used for private purposes, had preceded any prospective or actual use in income producing activities and deductions were no longer sought. Depreciation was claimed on a library of material, described as the “Big Box”, which was said to be a guide to renovation of properties and included guides as to sourcing of tools and materials. This had
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2005 ATC 2172
been purchased from the seminar organisers for $2,495. Mr Petrovic said that he had completed renovations to the Strathmore rented property after the tenants vacated in March 2003, but had used outside contractors.
8. The Property Investment Retainer Fee was said to have been paid to the seminar organisers to be included in offers of property for sale. It was said that each participant was entitled to purchase those properties on the list each year and that it was necessary to make one purchase in a year in order to receive such offers in the succeeding year. Mr Petrovic said that the property at Camberwell was purchased from those offered at, what he believed to be, a favourable price. It was noted that a further “sourcing fee” of $6,600 was paid on the purchase of the property.
9. The Investment Registration Fee was said to have been a fee to receive details of developers seeking finance. Mr Petrovic said that he invested $20,000 for 12 months in September 2003 and $37,000 for 18 months in November 2003 as second mortgage finance to developers. Again, this fee was paid to the organisers of the seminars. Mr McMahon conceded at the hearing that this fee was likely to have been of a capital nature.
10. It is clear that Mr Petrovic paid excessive amounts for the seminars and services claimed as deductions. The principal, Mr Henry Kaye, has been the subject of much publicity, particularly in relation to the charges of misrepresentation by the Australian Competition and Consumer Commission. However, it is clear that it is no part of the respondent’s or the Tribunal’s role to consider whether a taxpayer has paid too much, but only whether he or she has incurred the expense and whether that expense was incurred in gaining or producing assessable income or was necessarily incurred in carrying on a business for the purpose of gaining or producing such income. It appears, from the applicant’s statement of facts and contentions filed prior to the hearing that Mr Petrovic attended further courses entitled “Business mastery Boot-camp, Entrepreneurial Mastery, Business Mastery and Marketing”, but expenses of these were not claimed. It is a matter of conjecture as to how much money was expended in total for the benefit of Mr Kaye’s empire. It was said that the expenses claimed were those most relevant to Mr Petrovic’s activities.
11. It was submitted by Mr McMahon that the expenses claimed related to an ongoing activity which commenced with the purchase of the Strathmore property in 1999 and which became more professional, organised and directed when redundancy was looming. It was said that, while the purchase in 1999 may be sufficient to conclude that a business of property dealing had commenced, the expenditure was directly related to assessable income from an existing source and, prospectively, from further intended transactions.
12. It was submitted by the respondent that none of the expenses claimed was incurred in gaining or producing assessable income. It was said that, at the time when Mr Petrovic attended the Investment Mastery Seminar, he had a part share in a residential rental property and a vacant block of land and no element of the expenditure had a sufficient connection to the derivation of income from those sources. It was submitted that Mr Petrovic was not carrying on a business of real estate rental either then or at any time in the relevant period. Ms Riley submitted, further, that the cost of the seminars and other items claimed were disproportionate to the income generated. The expenses claimed in the two years amounted to $36,756 with rental income being $4,160 in the year ended 30 June 2002 and $5,677 in the year ended 30 June 2003.
13. It is clear that, prior to incurring the expenditure, Mr Petrovic had a share in one rented property and, apart from a period of vacancy when repairs and renovations were done, has continued to derive rental from that property. Apart from the purchase and sale at a modest profit of a vacant block of land, his only other property venture has been the purchase of a commercial office suite under a contract dated July 2002. On that history, it cannot be said that he has carried on a business of dealing in or renting of property. Consequently, it cannot be said that any of the expenditure was incurred in carrying on a business for the purpose of gaining or producing assessable income.
14. It is then a question of whether it can be said that the expenditure was incurred in gaining or producing assessable income and further, whether it represented a loss or outgoing of a capital nature. In the numerous cases involving claims for expenditure the words “incidental and relevant” or
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2005 ATC 2173
“sufficiently linked” to the derivation of assessable income have been used. Here it is difficult to see that any of the expenditure incurred and claimed were incidental and relevant or sufficiently linked to the derivation of Mr Petrovic’s rental income. There was no evidence of any impact by the expenditure on his pre-existing rental income. Subsequent to the seminar, he purchased another property but, apart from what might be seen as the payment of an excessive fee for the privilege of entering into a contract for such a purchase, I am unable to see from the evidence of Mr Petrovic that the fees paid to the promoters had any relevant connection with the subsequent derivation of a commercial rental of that property. At best, the incurring of that expenditure was itself an investment of capital to prepare him for the future commencement of a business property investment should he choose to do so and had the financial ability.
15. I was unable to discern from the evidence of Mr Petrovic any relevant connection with his derivation of rental or interest income of the expenditure on the Weekly E-property report, the Home Price Guide (which appeared to be limited to the area in which he resided), the cameras or the “Big Box”. In my view the Property Investment Retainer Fee was expenditure of a capital nature as being relevant, at best, to the purchase of a property rather than any income which may be derived subsequently. It was conceded at the hearing that the Investment Registration Fee was, similarly, expenditure of a capital nature.
16. It follows from the foregoing that the expenditure claimed as a deduction in the two years in question is not an allowable deduction and the objection decisions under review should be affirmed.
ATO ID 2003/324
Income Tax
Deductions: rental property expenses: property investment seminar
This ATO ID was amended to improve clarity and to include a reference to Taxation Determination TD 95/60.
FOI status: may be released
Status of this decision: Decision Current
CAUTION: This is an edited and summarised record of a Tax Office decision. This record is not published as a form of advice. It is being made available for your inspection to meet FOI requirements, because it may be used by an officer in making another decision.
This ATOID provides you with the following level of protection:
If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Issue
Is the taxpayer, who derives income from rental properties, entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for expenses incurred in attending a property investment seminar?
Decision
Yes. The taxpayer is entitled to a deduction under section 8-1 of the ITAA 1997 for expenses incurred in attending a property investment seminar but only to the extent that the expenses relate to the gaining or producing of assessable income from their existing rental properties.
Facts
The taxpayer owns several residential properties which have been rented out for a number of years.
The taxpayer is not carrying on a business of letting properties.
In each of the years the properties were rented the taxpayer has included rent in assessable income and claimed expenses against that income.
The taxpayer incurred expenses, including airfares, accommodation and fees in attending a property investment seminar and workshop. The taxpayer’s sole purpose in travelling was to attend the seminar and workshop.
The seminar focussed on investment strategies and techniques in relation to both commercial and residential properties. The seminar included such topics as developing investment business plans, strategies for dealing with financiers, developers and real estate agents, maximising opportunities for increasing investment property ownership and maximising the return on current investment properties.
The seminar was conducted over two days with approximately 20% of the time spent in providing information about the management of rental properties and maximizing rental income.
The taxpayer intends to use the information gained about management of rental properties to reduce expenses incurred in relation to their investment properties.
The taxpayer has not acquired any further investment properties since attending the investment seminar.
Reasons for Decision
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 seminar related to future property investment. As such the primary purpose of the seminar was to give the taxpayer 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 taxpayer’s income earning activities from any future investment properties ( FC of T 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.
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 taxpayer’s 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 seminar that dealt with the management of current rental properties and maximizing the income from those investments 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 seminar.
There must be a reasonable basis for the apportionment of the total cost between deductible and non deductible components. An apportionment based upon the time spent in the seminar relating to deductible (that is 20%) and non deductible expenditure (that is 80%), is a reasonable basis for apportionment. Accordingly a deduction for 20% of the total cost in attending the seminar is allowable under subsection 8-1(1) of the ITAA 1997.
Date of decision: 21 March 2003
Year of income: Year ended 30 June 2003
Legislative References:
Income Tax Assessment Act 1997
subsection 8-1(1)
Case References:
Federal Commissioner of Taxation v. Cooper
(1991) 29 FCR 177
(1991) 21 ATR 1616
91 ATC 4396
Federal Commissioner of Taxation v. Maddalena
71 ATC 4161
(1971) 2 ATR 541
Related Public Rulings (including Determinations)
TD 95/60
Keywords
Deductions & expenses
Real estate related expenses
Rental expenses
Date of publication: 15 May 2003
ISSN: 1445-2782