Private ruling: Home office expenses
Published: July 2012
Ruling period: Year ended 30 June 2012 | Year ended 30 June 2013 | Year ended 30 June 2014 | Year ended 30 June 2015
Date scheme commenced: 1 July 2011

Ruling: Q1: Can you claim a portion of your rent as a work-related deduction with regards to your home office? | A1: Yes. | Q2: Can you claim a portion of the costs for electricity/gas as work-related deductions with regards to your home office? | A2: Yes

Relevant facts and circumstances: You are the operations manager and administrator for your employer. Your employer has a warehouse which is dedicated purely to manufacturing. Due to the warehouse having no dedicated office, you are required to perform the business' administrative functions from home. You rent a home, and incur rent expenses. You live at this home with your family. The rental agreement is in both your name and your spouse's name. You incur expenses for electricity used for lighting, heating/cooling and powering the devices needed for your work. You work approximately 40 hours a week at home. You perform duties at the warehouse approximately 50% of the time. You have one room of your home dedicated solely to the storage of business materials. You perform business operations in another room, part of which is set aside exclusively for business purposes. Your family uses part of this room approximately 50% of the time, and you use the whole room exclusively for work purposes the other 50%. Approximately half of the area of your home is used for income-producing purposes

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) provides that you may deduct from your assessable income any loss or outgoing to the extent that it is incurred in gaining or producing your assessable income except where the loss or outgoing is capital or private in nature. Taxation Ruling 1993/30 (TR 93/30) provides that as a general rule, expenses associated with a taxpayer's home are of a private or domestic nature and do not qualify as deductions for taxation purposes. However, a portion of these expenses are allowable deductions where either: · part of the home is used for income producing activities and has the character of a place of business, or · part of the home is used in connection with the taxpayers income earning activities but does not constitute a place of business. Whether an area of the home has the character of a place of business is a question of fact. Where part of a home is set aside exclusively for the carrying on of a business by a self-employed person (for example, a doctor's surgery), or where it is used as a taxpayers sole base of operations for income producing activities (for example, where no other work location is provided to an employee by an employer), it is likely to have this character. TR 93/30 provides a number of factors which tend to indicate that an area set aside has the character of a place of business, which include: · the area is not readily suitable or adaptable for use for private or domestic purposes · the area is used exclusively or almost exclusively for income producing purposes. The deductible expenses in respect of a home office can be divided into two broad categories: · Occupancy expenses - expenses relating to ownership or use of a home which are not affected by the taxpayer's income earning activities, such as rent. · Running expenses - expenses relating to the use of facilities within the home, such as electricity charges for heating/cooling and lighting. Where an area has the character of a place of business, some part of the expenses from both categories may be claimed as a deduction. However, where an area of the home is simply used in connection with income producing activities and does not have the character of a place of business, only running expenses are allowable to the extent they are additional expenses incurred as a result of the income producing activities. In your case, your employer does not have a dedicated office at the main warehouse, and requires you to perform the business' administrative duties from home. You have one room set aside purely for storage of business materials, and use the lounge room for work purposes. When you are using either room for work purposes, your family is not allowed to use them for private purposes. You spend a considerable amount of time each week using your home office for income-producing purposes. Your home office is considered to have the character of a place of business, therefore you are entitled to a deduction for some part of both your occupancy and running expenses under section 8-1 of the ITAA 1997. | Detailed Reasoning - Occupancy costs: In most cases the apportionment of occupancy expenses should be made on the basis of floor area and, where the area of the home is used for part of the year only, on a time basis. For example, if the room used solely for income producing purposes (for the entire income year) is 30 square metres, and the home is 100 square metres, then a deduction for 30% (30/100) of the allowable occupancy expenses are deductible. In this example, if the room was to be used partly for private purposes, this percentage would have to be again apportioned between income-producing and private use. For instance, in the above example, the room is used for 35 hours a week for income-producing purposes and 35 hours a week for private purposes, then the deduction of 30% for floor space would be reduced by 50% (35/70 total hours per week for income producing purposes), allowing for a total deduction of 15% of occupancy expenses. In the case of more than one room used for income-producing purposes, this apportionment must be made for each room individually, and added to create an overall total. Following the above example, in addition to the 30 square metre room used 50% of the time for income-producing purposes, there is another room used exclusively for income-producing purposes, 20 square metres in size. In this case, having established a reasonable percentage of 15% for the 30 square metre room, the 20% for the 20 square metre room (20/100) will be added to this total, giving a combined 35% deduction for the total occupancy expenses. | Detailed Reasoning - Running costs: Practice Statement Law Administration 2001/6 provides that individual taxpayers who claim deductions for work or business related home office running expenses such as electricity and gas may claim either a deduction for the actual expenses incurred or a deduction calculated at the rate of 34 cents per hour. A deduction is allowable only where additional running costs are incurred by a taxpayer because of income producing activities. Normally, a taxpayer would have to keep a complete diary recording the duration and purpose of each use of their home office during the year in order to demonstrate the connection between the use of their home office and their work or business. However, the Commissioner will accept diary records covering a representative four week period as establishing a pattern of use for the entire year. A new diary must be kept for each financial year, as patterns of use are likely to fluctuate over two or more years.

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