Private ruling: property expenses
Ruling period: Year ended 30 June 2010
Date scheme commenced: 1 July 2009

Ruling: Q1: Are you entitled to deductions for expenses incurred in relation to your property that is used for accommodation and storage? | A1: No.


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

Reasons for decision: Summary: You are not entitled to any deductions in relation to your property as it is not an income producing asset. The associated expenses do not have sufficient nexus to your assessable rental income. Furthermore, the expenses in relation to this property are inherently private in nature. | Detailed Reasoning - Detailed reasoning: 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 or are necessarily incurred in carrying on a business for the purpose of 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, or a provision of the ITAA 1997 prevents it. A number of significant court decisions have established that, for an expense to satisfy the requirements of section 8-1 of the ITAA 1997: · It must have the essential character of an outgoing incurred in gaining assessable income or, in other words, of an income producing expense ( Lunney & Hayley v. Federal Commissioner of Taxation (1958) 100 CLR 478; (1958) 11 ATD 404; (1958) 7 AITR 166) · There must be a nexus between the outgoing and the assessable income so that the outgoing is incidental and relevant to the gaining of assessable income ( Ronpibon Tin NL v. Federal Commissioner of Taxation (1949) 78 CLR 47; (1949) 8 ATD 431; (1949) 4 AITR 236); and · It is necessary to determine the connection between the particular outgoing and the operations or activities by which the taxpayer most directly gains or produces their assessable income ( Charles Moore & Co Pty Ltd v. Federal Commissioner of Taxation (1956) 95 CLR 344; (1956) 11 ATD 147; (1956) 6 AITR 379 and Federal Commissioner of Taxation v. Hatchett (1971) 125 CLR 494; 71 ATC 4184; (1971) 2 ATR 5570. The meaning of the phrase 'losses and outgoings' was also discussed in Amalgamated Zinc (De Bavay's) Ltd v FCT (1935) 54 CLR 295. This case highlighted that it is probably fair to say that the expense must have some link to the generation of income and not simply to the work itself. Dixon J at 303 said: The expression "in gaining or producing" has the force of "in the course of gaining or producing" and looks rather to the scope of the operations or activities and the relevance thereto of the expenditure than to purpose in itself. Expenses in relation to rental properties are generally allowed where the property is rented or is available for rent. In your case, the property is not advertised for rent or available for rent. Therefore the expenses incurred in relation to this property are not considered to be allowable rental expenses. The property is more in the nature of a second place of residence. That is, it is a place to live when you are in place A and not an income producing property. The premises are solely for your use. Accommodation expenses are usually private or domestic in nature. Similarly, the costs associated with a taxpayer's home are normally of a private or domestic nature and do not qualify as deductions for taxation purposes ( Federal Commissioner of Taxation v. Faichney (1972) 129 CLR 38; 72 ATC 4245; (1972) 3 ATR 435). An exception to this general rule is where the property is used for income producing activities and has the character of a 'place of business'. In such cases some of the expenses incurred in respect of the property may be partly deductible. Taxation Ruling TR 93/30 discusses the deductibility of home office expenses. The principles can be applied to other instances in which income producing activities are undertaken in a taxpayer's property. TR 93/30 also provides guidelines as to when an area of the home has the character of a place of business. Whether an area of the home has the character of a place of business is a question of fact which depends on the particular circumstances of each case. 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 (for example, a doctor's surgery). The following factors 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 a business, · the area is used regularly for visits of clients or customers. In your case, your property is not regarded as a place of business and no income producing activities are actually carried out at the property. Therefore the principles of TR 93/30 do not apply in your situation and no occupancy or running costs are allowable in relation to the property. We acknowledge that you use the property for the storage of equipment used for your rental properties. Such costs incurred relate directly to the storage of the equipment and not to the derivation of your rental income. The connection with your assessable income is insufficient. Furthermore, the essential character of the associated expenses is private. In your private ruling application you referred to the case of Spriggs v. Federal Commissioner of Taxation, Riddell v. Federal Commissioner of Taxation (2009) 239 CLR 1; 2009 ATC 20-109; (2009) 72 ATR 148. It is considered that your situation can be distinguished from that case. There the High Court found that each taxpayer carried on a business. These cases indicated that the contractual framework under which an individual carries out their income earning activities, and the synergy or connection between the various activities is relevant. In your case, you are not carrying on a business and there is no necessary connection affecting a clear 'synergy' between the rental income derived and the expenses of your additional property in place A. A careful analysis of your specific circumstances and the character of the expenses indicate that the expenses are not incurred in earning your assessable rental income. The connection between the expenses and your assessable income is too remote. Such outgoings do not satisfy the tests for deductibility. Accordingly, you are not entitled to a deduction under section 8-1 of the ITAA 1997 for the expenses incurred in relation to this property as the expenses are private in nature and not sufficiently connected to your assessable income.

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 are a joint owner of several rental properties in place A. | You live and have your main residence in place B. | Every fortnight you travel to place A to provide general maintenance, correspond with property agents and undertake mowing and gardening for your rental properties. | You own another property in place A which you use to store a gardening equipment. You also use this property as a place of accommodation when you are in place A.