Private ruling: Home office expenses
Published: November 2014
Ruling period: Year ended 30 June 2009 | Year ended 30 June 2010 | Year ended 30 June 2011 | Year ended 30 June 2012 | Year ended 30 June 2013
Date scheme commenced: 1 July 200X

Ruling: Q1: Are you entitled to deductions for occupancy costs for your home office? | A1: No.


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) 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 557). A deduction is generally not allowable for the costs associated with a person's home as they are private in nature ( 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 Income tax: deductions for home office expenses discusses the deductibility of home office expenses. Home office expenses are divided into two broad categories - occupancy and running expenses. Occupancy expenses relate to the ownership of a home such as mortgage interest, rates and insurance. Running expenses relate to the use of the facilities within the home such as electricity. If an area of the home has the character of a place of business, some part of the occupancy expenses may be claimed as a deduction. TR 93/30 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. The existence of any of these factors or a combination of them will not necessarily be conclusive in determining whether the home constitutes a place of business in the ordinary and common sense meaning of the term. The determination will depend on a balanced consideration of the essential character of the area, the nature of the taxpayer's business and any other relevant factors. It is not sufficient that a room in the home is used in association with a business. The fact that no other accommodation is available is not of itself sufficient to render a house as a place of business. In your case, the other property is more in the nature of a second place of residence. That is, it is a place to live when you are working in city A. In Federal Commissioner of Taxation v. Toms 20 ATR 466; 89 ATC 4373, the Federal Court held that expenses incurred in relation to accommodation near the work place, while maintaining a family residence in another location, were not an allowable deduction as they were considered to be private expenses. The Federal Court disallowed the forest worker's deduction for the cost of maintaining a caravan and other living expenses. The taxpayer's family home in Grafton was some 108 kilometres from the base camp so he lived in the caravan during the week and returned to the family home on weekends. The caravan was rendered necessary as much by the taxpayer's choice of the place of his residence in Grafton as by his employment in the State forest, and its purpose was to enable him to retain his residence in Grafton although he was employed in the State forest. Had he lived at a town closer to the forest, there is no question the caravan would have been unnecessary. Therefore where additional accommodation expenses are incurred to put a person in a place where they are closer to their place of employment, no deduction is allowed. The accommodation expenses incurred are not related to the actual performance of their income earning activities. They are more a convenience and a prerequisite to the earning of assessable income and are not expenses incurred in the course of gaining or producing that income. Furthermore, the essential character of the expense is of a private or domestic nature. Accordingly, no deduction is generally allowed for the associated expenses under section 8-1 of the ITAA 1997. On a balanced consideration of the facts surrounding your circumstances, we consider that your home office does not constitute a place of business. Your home office remains private as it is not clearly identifiable as a place of business, it is readily suitable or adaptable for private or domestic purposes and you do not have clients visit you at your home. Although it is used for your administration work, this is not sufficient for it to be regarded as a place of business. The connection with your assessable income is insufficient. Furthermore, the essential character of the associated expenses, are private. As highlighted above, it is not considered that your home office is a place of business therefore a deduction is not allowed for your home occupancy expenses under section 8-1 of the ITAA 1997. That is, the mortgage interest, rates, insurance and maintenance expenses are private in nature and not sufficiently connected to your assessable income and no deduction is allowed. Please note, as you use your office at home for administration purposes, a deduction is allowable for the additional running expenses such as electricity used exclusively for work related purposes.

Relevant facts: You purchased a property for the purpose of having a home office to perform your work. | Your main residence is in another State. | Your client and work locations were in areas which were too far to commute each day. | You were at your other property on average four to five days per week and returned to your main residence on weekends. You slept and had your meals at the other property during the week. | You used your home office for approximately 10-15 hours per week for administration and storage of equipment. | You have a laptop, printer, desk, chair, document storage, internet and Wi Fi connection, mobile phone charging and small meeting area at your home office. | Clients do not usually come to your home office. | You do not advertise your business. No business sign is on your property. | Your spouse would visit the other property periodically. The property was generally empty during the weekends however family members have stayed there occasionally. | You incurred costs for your mortgage interest, rates, insurance, maintenance and gas and electricity for the other property.