Private ruling: Carrying on a business using home garden, office and garage
Published: November 2014
Ruling period: Year ended 30 June 2014 | Year ended 30 June 2015 | Year ended 30 June 2016 | Year ended 30 June 2017
Date scheme commenced: 1 July 2013

Ruling: Questions and Answers: | 1. Is your eBay selling activity a business, for which you must lodge your business income in your income tax return? | Yes. | 2. Are you able to claim relevant deductions against your business income? | Yes. | 3. Should your deductible property ownership expenses (such as interest on your mortgage) be calculated using the percentage of your property used for business purposes? | No. | 4. Should your deductible property ownership expenses (such as interest on your mortgage) be calculated on a reasonable basis that takes into account the respective market values of your house and your land purchased with your mortgage loan and used for business purposes? | Yes.

Relevant facts and circumstances: You live on a suburban residential property, which includes a home, garage and land area. You also have a full-time job. Your mortgage payments include interest costs. Recently, you started a product selling store on eBay. Your sales and reputation are growing. Based on your last two months of sales, you can earn gross annual sales of at least $50,000. You estimate you use 50 precent of your Xsqm property for your activity, including your garage, corner of the living room and one bedroom. Your expenses include related car expenses; postage; and an amount for your E-Bay store plus a 20 cent item listing fee and 7% sales commission. You and your spouse provide the labour, working 2 to 3 hours per day on weekdays and between 10 to 15 hours each weekend.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Section 8-1 | Income Tax Assessment Act 1997 Division 40 | Income Tax Assessment Act 1997 Division 328-D

Reasons for decision: Detailed Reasoning - Business income: Subsection 6-5(1) of the Income Tax Assessment Act 1997 (ITAA 1997) states your assessable income includes income according to ordinary concepts, which is called ordinary income. Amounts received from transactions carried out in the ordinary course of business, such as the proceeds from the sale of trading stock (which includes goods on consignment), are normally considered to be ordinary income. The Commissioner's view about whether a taxpayer is carrying on a business is found in Taxation Ruling TR 97/11 . The following indicators, which have been developed by the courts of law, are used to determine whether an activity is the carrying on of a business: • whether the activity has a significant commercial purpose or character; • whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity; • whether there is repetition and regularity of the activity; • whether the activity is planned, organised and carried on in a businesslike manner; • the size, scale and permanency of the activity; and • whether the activity is better described as a hobby or form of recreation. Guidance about when a business activity has commenced is found in paragraph 98 of Taxation Ruling TR 2001/14 , which states for a business activity to have commenced a person must have: (i) made a decision to commence the business activity; (ii) acquired the minimum level of 'business assets' to allow that business activity to be carried on and; (iii) actually commenced 'business operations'. In your case, it is quite clear that you are carrying on a business, due to your prospect of profit and the repetition and regularity of your activity. Your activity has gone beyond a hobby or form of recreation due to the size, scale and permanency of the activity and due to its being carried on in a businesslike manner given you have opened your own eBay store that currently has many items of trading stock for sale. We consider you commenced your business at the time you opened your own eBay store. | Detailed Reasoning - General deductions: Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent to which they are necessarily incurred in carrying on a business for the purpose of producing assessable income, except where the outgoings are of a capital, private or domestic nature. Division 40 and Subdivision 328-D of the ITAA 1997 allows deductions to be claimed over time in respect of many expenses of a capital nature. Here you can deduct an amount equal to the decline in value of a depreciating asset that you hold. That decline is generally measured by reference to the effective life of the asset. Paragraph 27 of Taxation Ruling TR 95/15 summarises characteristics that expense need to satisfy to be deductible: (a) it must have the essential character of an outgoing incurred in gaining assessable income or, in other words, of an income-producing expense… (b) 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…and (c) 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 his or her assessable income… In your case, you can claim deductions against your business for all losses and outgoings to the extent to which they are necessarily incurred in producing your business income (such as your costs for E-Bay, postage, related car expenses, interest expenses, etc.). Your costs for depreciating assets must be deducted over time. | Detailed Reasoning - Interest expenses: Taxation Ruling TR 93/30 is about deductions for home office expenses. It states the following factors, 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": (i) the area is clearly identifiable as a place of business; (ii) the area is not readily suitable or adaptable for use for private or domestic purposes in association with the home generally; (iii) the area is used exclusively or almost exclusively for carrying on a business; (iv) the area is used regularly for visits of clients or customers; or (v) part of the home is used as a taxpayer's sole base of operations for income producing activities. The deductible expenses in respect of a home office can be divided into two broad categories: (i) ownership or occupancy expenses, such as mortgage interest, municipal and water rates, land taxes and house insurance premiums; and (ii) running expenses, such electricity charges, cleaning costs, cost of repairs in the office, etc. Only where an area of the home has the character of a place of business (as outlined above) can ownership or occupancy expenses be claimed as a deduction. The apportionment of expenses should be made on a reasonable basis. Generally, ownership or occupancy expenses claimed for the place of business used in the home should be apportioned on a floor area basis in relation to the home. However, where ownership or occupancy expenses are claimed for areas used as a place of business outside of the home, they should be apportioned on an area basis, taking into account the value of the land. For example, a property is 600sqm in area. The house is 200sqm in area. 40sqm of the house and 240sqm (including under the house) of the land is used for a business. Valued separately, the house and the land are of equal value. The interest expenses are $2,000 per month. The interest that can be claimed for the home office in the house is $24,000 (annual interest) x 50% (% value of the house) x 20% (% of house used for business) = $2,400. The interest that can be claimed for the use of the land is $24,000 (annual interest) x 50% (% value of the land) x 40% (% of land used for business) = $4,800. Therefore, in this example, although the area used for the business is 40% of the property area (240sqm divided by 600sqm), the deductible interest is only 30% of the total interest ($7,200 divided by $24,000). In your case, you can claim deductions for relevant interest expenses. However, you should not calculate your deductible interest expenses based on the portion of your property area you use for your business. Instead, you should value your house and land separately and calculate your deductible interest expenses accordingly.