Private ruling: Deduction - home office expenses
Published: August 2014
Ruling period: Year ended 30 June 2011
Date scheme commenced: 1 July 2010

Ruling: Q1: Are you entitled to a deduction for a portion of rental expenses for an office area at your residence? Answer: No Question 2: Are you entitled to a deduction for a portion of running expenses in relation to an office area at your residence? Answer: Yes.



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 assessable income except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income. For a deduction to be allowable for home office expenses, the expenses must satisfy the requirements of section 8-1 of the ITAA 1997. Normally, expenses associated with a taxpayer's home are private or domestic in nature and therefore do not qualify as allowable deductions ( Thomas v FC of T (1972) 3 ATR 165; 72 ATC 4094 and FC of T v Faichney (Faichney Case) (1972) 3 ATR 435; 72 ATC 4245). However, where the home is used for income producing activities and has the character of a place of business, a deduction may be allowable for a portion of: · occupancy expenses such as rent, mortgage interest, municipal and water rates and house insurance premiums, and · running expenses such as electricity charge for heating and lighting, cleaning costs, decline in value, and repairs to equipment (Taxation Ruling TR 93/30). This is likely to be the case where a part of a residence is set aside exclusively for the carrying on of a business by a self-employed person and where part of the home is used as a taxpayer's sole base of operations for income producing activities (for example, where no other work location is provided to an employee by an employer). The absence of an alternative place for conducting income producing activities has also influenced a court or tribunal to accept a part of a taxpayer's residence as a place of business. Examples include: · a self-employed script writer using one room of a flat for writing purposes and for meetings with television station staff (Swinford v. FC of T (1984) 15 ATR 1154; 84 ATC 4803) · an employee architect who did freelance work in a room in the home - Case F53, 74 ATC - where one bedroom was used 'virtually exclusively' as a studio · clergyman who set aside a room in the house as an administration centre and for discussing problems with parishioners - Case Q54, 83 ATC 293 · a sales representative for a publishing company was not provided with an office but was required to maintain a separate room as an office in their home to carry out work duties - Case U65, 87 ATC 415 . · a country sales manager for an oil company whose employer did not provide him with a place to work (Case T48 86 ATC 389; Case 47 29 CTBR(NS) 355). In each of these cases, the taxpayer was able to show that, as a matter of fact, there was no alternative place of business, it was necessary to work from home, and that the room in question was used exclusively or almost exclusively for income producing purposes. The following factors noted at paragraph 5 of TR 93/30, none of which is necessarily conclusive on its own, may indicate whether or not an area set aside 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 business; or · the area is used regularly for visits of clients or customers. It is the Commissioner's view in TR 93/30 that a place of business exists only if: · it is a requirement inherent in the nature of the taxpayer's activities that the taxpayer needs a place of business · the taxpayer's circumstances are such that there is no alternative place of business and it is necessary to work from home, and · the area is used exclusively or almost exclusively, for income-producing purposes (paragraph 13 of TR 93/30). If an area of the home has the character of a place of business as per the criteria set out in paragraph 5 of TR 93/30, then a portion of occupancy expenses and running costs under section 8-1 of ITAA 1997 will be allowable. However, where an area of the home is simply used in connection with income producing activities but does not have the character of a place of business, then only additional running expenses attributable to the income-producing area of the home will be allowable. In Case Q92 83 ATC 461 ( Case Q92 ), an Inspector of Schools who used his home as a base of operations for his job was also denied a deduction for insurance, mortgage interest and rates. The taxpayer used his home as an office because there was no space within his district that he could use even if he had been required to. He had set aside an area of his home where office equipment and records were kept. His home address and telephone number were listed as his office-residence. The Board of Review held that the expenses claimed were domestic in character. The Chairman Mr Stevens said at 463: The expenditure involved retains, in my view, the essential characteristic of being in relation to the provision of a home and, as such, not allowable in terms of subsection 51(1)...I do not think that the use by an employee of his home as -his base of operations- (even if not purely or mainly for his own benefit or the result of his own choice) makes it, or a portion thereof, analogous to a doctor's surgery that is part of the doctor's residence.' Your circumstances can be distinguished from the cases where the courts and tribunals have accepted that a taxpayer's residence is a place of business as you have set up an office area in an open area of your residence to conduct your income earning activities. Your circumstances are similar to Case Q92 in that the business you provide services to has no commercial business premises. You have set up an office area at your residence where office equipment and business records, stationary and equipment are kept. In applying the criteria noted at paragraph 5 of TR 93/30, it is considered that: · the area is not clearly identifiable as a place of business. While the clients of the business can contact you through the business telephone number, there is no indication that there is anything from the outward appearance of your residence that it is a place of business · the office area is part of the open area which is readily suitable for private use · you carry out the work activities for the business at your residence. However, the open area is not used exclusively for income producing purposes · clients of the business do not visit your place of residence. Therefore, the essential character of the office area you have set aside to perform your income earning activities is not considered to be a place of business. You will not be entitled to a deduction for a portion of your occupancy expenses, such as rent, under section 8-1 of the ITAA 1997. However, since you do perform income producing activities at home, you will be entitled to a deduction under section 8-1 of the ITAA 1997 for the running costs of your home office to the extent that the costs incurred relate to your income earning activities.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns. | Relevant facts: You started an income earning activity. | You operate this activity out of your residence. | You currently provide services to a business. | The owner of the business does not have commercial business premises. | Your residence has a number of rooms. | You use part of an open area of a large room as an office area for the business. | The business's mail, stationary and some equipment are delivered to your residence. | On occasion the equipment is temporarily stored at your residence. | You use the office area for a number of hours per week for the business. The owner of the business has provided office equipment for the office area. | There is no signage on your residence to indicate a business activity is conducted at the property. | Clients of the business contact you through the business telephone number noted on the business's stationary and business cards. | The address of your residence is not noted on the business's stationary or business cards. | Clients of the business do not visit your residence. | After you have finished work each day, the open area is used for private purposes. | The owner and the contractors of the business have access to some other areas of your residence. | Relevant legislative provisions: Income Tax Assessment Act 1997 section 8-1 Reasons for decision