Private ruling: Deductions - home office expenses
Published: July 2013
Ruling period: 1 July 2012 to 30 June 2013 | 1 July 2013 to 30 June 2014 | 1 July 2014 to 30 June 2015
Date scheme commenced: During the income year ending 30 June 2013

Ruling: Q1: Area A | A1: Yes | Q2: Area B | A2: No | Q3: Area C | A3: Occupancy expenses - No Running expenses - Yes | Q4: Area D | A4: No | Q5: Area E | A5: No | Q6: Area F | A6: No | Q7: Area G | A7: No | Q8: Area H | A8: No

Relevant facts and circumstances: A company intends to run several businesses from the home.

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

Reasons for decision: Summary: Section 8-1 of the ITAA 1997 provides: 8-1(1) You can deduct from your assessable income any loss or outgoing to the extent that: (a) it is incurred in gaining or producing your assessable income; or (b) it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income. 8-1(2) However, you cannot deduct a loss or outgoing under this section to the extent that: (a) it is a loss or outgoing of capital, or of a capital nature; or (b) it is a loss or outgoing of a private or domestic nature; or (c) it is incurred in relation to gaining or producing your exempt income or your non-assessable non-exempt income; or (d) a provision of the Act prevents you from deducting it. Taxation Ruling TR 93/30 Income tax: deductions for home office expenses (TR 93/30) explains that expenses associated with a taxpayer's home are private or domestic in nature, and would not normally qualify as a deduction for taxation purposes (paragraph 9), but goes on to explain the circumstances where deductions may be claimed. TR 93/30 explains that different types of use of a home qualify for different deductions: · where the home has the character of a 'place of business', a deduction will be allowable for a proportion of 'occupancy expenses' , · That part of a home used as a 'private study' or home office is in connection with the taxpayer's 'income producing activities', but does not constitute a 'place of business' will qualify for a deduction for a proportion of the 'running expenses'. | Detailed Reasoning - 'Place of business': TR 93/30 sets out the following criteria to determine whether a home office has the character of a 'place of business': · the area is clearly identifiable as a place of business; · the area is not readily suitable or adaptable for use for private or domestic purposes in association with the home generally; · the area is used exclusively or almost exclusively for carrying on a business; · the area is used regularly for visits of clients or customers. Where an expense is incurred for business and private purposes, the amount that relates to earning assessable income must be determined by an apportionment of the expense. Paragraph 14 of Taxation Ruling TR 95/33 states that when apportioning expenditure, the appropriate method of apportionment will depend on the facts of each case. However, the method adopted in any particular case must be fair and reasonable in all the circumstances for it to be acceptable. Where an area of the home has the character of a place of business, paragraph 7 of TR 93/30 states that in most cases the apportionment of expenditure should be made by using the floor area of the home and, in addition, where the area of the home is a 'place of business' for part of the year, a time basis. | Detailed Reasoning - Deductions for occupancy expenses: Occupancy expenses are those expenses you pay to own, rent or use your home, even if you are not carrying on a home-based business. Occupancy expenses include: · rents or mortgage interests · council rates · water rates · house insurance premiums. To calculate a deduction for occupancy expenses, it is necessary to apportion expenses between private and business/employment use. In most cases apportionment of expenses should be made on a floor area basis, and in addition, where the area of the home is a place of business for only part of the income year, a time basis. | Detailed Reasoning - Deductions for running expenses (including depreciation expenses): Running expenses are the increased costs of using facilities within your home because of your business activities. Running expenses include: · the costs of using a room, such as electricity and gas costs for heating, cooling and lighting · business phone costs · the decline in value of plant and equipment · the costs of repairs to furniture and furnishings. You are entitled to claim a deduction for the running expenses in relation to the home office that is actually incurred through the income producing activities which is additional to the private expenditure. To calculate running expenses, the Commissioner accepts a diary kept for a period of four weeks in order to establish the pattern of use for the whole income year. Two acceptable methods taxpayers can use are: · option one - calculating the actual running expenses and apportioning them according to the pattern of business use shown in the diary, or · option two - claiming an amount per hour for business/employment use in respect of heating, cooling, lighting and depreciation of furniture. A diary can show the pattern of use. Note that decline in value of home office furniture is included in this calculation but you need to separately calculate some items (for example, telephone expenses, and decline in value of computers) and apportion according to the business use. It would be necessary to look at each of these types of expenses individually to estimate the level of use for business purposes. The floor area as a method of apportionment would only be appropriate where it produced a reasonable estimate of additional use for a particular type of expense.

Issue: With respect to form and physical function, can the applicant claim a deduction under section 8-1 of the ITAA 1997 for occupancy and running expenses associated with particular areas of the property identified by the applicant as areas A through H inclusive? | This issue has been considered for each individual area, below.