Private ruling: Rental deductions
Date of advice: 21 April 2023
Published: 5 June 2023
Ruling period: Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Are you able to claim the expense you incur renting a property in State Z as a deduction? | A1: No.

Relevant facts and circumstances: You and your spouse moved to State Z for work purposes. You are renting a property in State Z. You were living in City Y prior to moving to State Z. You rent your home out in City Y while you are living and working in State Z. The amounts earned as rental income is of a similar value to the expense incurred in earning the rental income.

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

Reasons for decision: Summary: According to section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997), you can deduct a loss or outgoing if it is incurred in producing your assessable income except where the outgoing is of a capital, private or domestic nature. The term 'incurred in gaining or producing assessable income' means incurred 'in the course of gaining or producing assessable income'. For an expense to be incurred in gaining or producing assessable income it is both sufficient and necessary that the occasion of the expense should be found in whatever is productive of assessable income. Taxation Ruling 2021/4 Income tax and fringe benefits: employees: accommodation and food and drink expenses, travel allowances, and living-away-from-home allowances (TR 2021/4) considers the deductibility of accommodation and food and drink expenses. Accommodation and food and drink expenses are ordinarily private or domestic in nature and are generally not deductible under section 8-1. Paragraphs 14-15 of TR 2021/4 states: 14. Living expenses are a prerequisite to gaining or producing an employee's assessable income and are not incurred in performing an employee's income-producing activities. Living expenses are also private or domestic in nature. This means that even if these expenses were incurred in gaining or producing assessable income, they still would not be deductible due to the application of paragraph 8-1(2)(b). 15. While living expenses must be incurred before any assessable income can be derived, a loss or outgoing is not incurred in gaining or producing an employee's assessable income merely because it is necessary. This is particularly relevant to living expenses. A person must eat and sleep somewhere, whether or not they engage in employment. To be deductible, the accommodation and food and drink expenses must have a sufficiently close connection to the performance of the employment duties and activities through which the employee earns income. It will not be enough to show some general link or causal connection between the expenditure and the production of income. The occasion of the outgoing on accommodation and food and drink must be found in the employee's income-producing activities, rather than in the personal circumstances of where the employee lives. The courts have concluded that accommodation and meal expenses incurred while working away from home are essentially living expenses of a private or domestic nature and therefore are not deductible. The expenses you incurred enabled you to stay in proximity to your workplace. They are a prerequisite to the earning of assessable income and are not expenses incurred in the course of gaining or producing that income. In the case Federal Commissioner of Taxation v. Charlton 84 ATC 4415; (1984) 15 ATR 711 (Charlton's Case), the taxpayer was a pathologist employed to carry out autopsies for the local coroner in Bendigo. He rented a flat in Bendigo while maintaining a permanent family home in Melbourne, located approximately 150kms away. There was evidence that there was difficulty in finding motel accommodation in Bendigo and the taxpayer was reluctant to make the round trip back to Melbourne without rest. The taxpayer claimed that the rental expenses were incurred in the production of assessable income. Justice Crockett of the Supreme Court of Victoria allowed the Commissioner's appeal and ruled: The Commissioner contends (correctly in my view) that, if the taxpayer should choose to reside so far from the place where it is necessary for him to be in order to gain his income that he, not only needs to incur expense in travelling to that place but, also to incur expense in the provision to him of some accommodation transitory or discontinuous in its use and secondary to or temporarily supplemental of his actual home, then that expense, too, is for the same reason non-deductible. The taxpayer's election to live in Melbourne and not in Bendigo meant that the rental expended on the flat in order to enable him to secure accommodation in which to recuperate from the rigours of travel and the nature of his work was an expenditure dictated not by his work but by private considerations. This is supported by the decisions in Federal Commissioner of Taxation v. Toms 89 ATC 4373; (1989) 20 ATR 466 (Toms Case), where the Federal Court held that expenses incurred in relation to accommodation near the workplace while maintaining a family residence in another location were not an allowable deduction as they were considered to be private expenses. Your case is comparable to that of the taxpayers in Charlton's case and Toms case. You were required to move from City Y to State Z for work purposes. Renting accommodation in State Z put you in the position to be able to undertake your work duties, the expense was not incurred in the course of carrying out your work duties. The accommodation expense is considered to be private in nature and is not deductible under section 8-1 of the ITA 1997. The expenses also have no connection to the derivation of the rental income on the City Y property. Moving from City Y to State Z put you in a position to derive rental income from the property, the expense of renting in State Z was not incurred in the course of earning rental income. The expense remains private and domestic in nature.