Private ruling: Home office expenses
Date of advice: 26 July 2016
Published: September 2016
Ruling period: Year ended 30 June 2012 | Year ended 30 June 2013 | Year ended 30 June 2014 | Year ended 30 June 2015 | Year ended 30 June 2016
Date scheme commenced: 1 August 2011

Ruling: Q1: Are you entitled to a deduction for a portion of rental expenses and water rates for an office area at your residence? | A1: No.

Relevant facts and circumstances: You are an Australian resident for tax purposes. You are employed by an international company. The team you work with is based overseas. Your duties involve the coordination of global projects across various overseas locations with minimal inclusion of Australia. Due to the regions you deal with and the nature of your work, you are required to spend the majority of your working hours communicating with these areas outside Australian standard working hours, at times holding telephone conferences at 2am. Your employer maintains an office space in the city in which you live; however this office is for local based teams rather than offshore based teams, for whom the employer has a policy of working from home. You have submitted a letter from your employer stating that your working from home is within compliance of the policy of the Australian office. You are able to use the office space provided by your employer, however you choose not to use this office space due to the late hours of your work and you feel safer working from home at that time of night. Your employer has provided you with a laptop computer and mobile phone as well as reimbursing you for the majority of your telephone and internet expenses. You maintain an office space at home in a designated area with a laptop computer and a phone, using approximately 15% of the floor space of your residence.

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 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 taxation legislation excludes it. Taxation Ruling TR 93/30 sets out the Commissioner's views concerning the deductibility of home office expenses. The deductibility of particular expenses depends upon whether the home can be characterised as a 'place of business.' Where a home is a place of business, a taxpayer may be able to claim some or all of the following 'occupancy' and 'running' expenses: Occupancy expenses: Expenses relating to ownership or use of a home which are not affected by the taxpayer's income earning activities... These include rent, mortgage interest, municipal and water rates and house insurance premiums. Running expenses: Expenses relating to the use of facilities within the home… These include electricity charges for heating/cooling, lighting, cleaning costs, depreciation, leasing charges and the cost of repairs on items of furniture and furnishings in the office. Where the home cannot be characterised as a place of business, the occupancy expenses cannot be claimed as a tax deduction. Where the home is nevertheless used for the production of assessable income, a deduction may be allowable for the running expenses. Paragraph 5 of TR 93/30 lists some of the factors which may indicate that a part of a home has the character of a 'place of business'. These are that: • 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; or • 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 ascertaining the character of an area used as a home office. Rather the decision in each case will depend on whether, on a balanced consideration of the essential character of the area, the nature of the taxpayer's business and any other relevant factors, the area constitutes a -place of business- in the ordinary and common sense meaning of the term. In Handley v FC of T 81 ATC 4165 the taxpayer was a barrister who purchased a home in 1969 as a family residence. One reason for purchasing the property was that it contained a room which the taxpayer considered would be suitable to use as his study. He used this room principally as a study and worked in it for 20 hours per week, 45 weeks of the year. In 1972, 1973 and 1974 the taxpayer claimed a proportion of the mortgage interest, council rates, taxes and insurance premiums as deductions attributable to the room used as a study. The majority of judges held that the expenses claimed were of a capital, private or domestic nature. Although the study was predominantly used for the purpose of the taxpayer's profession it remained an integral part of his home. The payments did not have the character of outgoings incurred in gaining or producing assessable income nor were they necessarily incurred in carrying on the taxpayer's profession. The High Court dismissed the appeals. It is difficult for an employee to establish that their home is a 'place of business'. This is because the employee is not conducting a business in their own right and is usually provided with a place of work by their employer. In many cases, an employee may only choose to work at home at given times as a matter of convenience. However, as stated in paragraph 12 of TR 93/30: '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.' The courts supported this view in Swinford v FC of T (1984) 15 ATR 1154; 84 ATC 4803 where a self-employed script writer used one room of a flat for writing purposes and for meetings with television station staff. In addition, Case F53 74 ATC 294 concerned an employee architect conducting a small private practice from home, while Case T48 86 ATC 389 concerned a country sales manager for an oil company whose employer did not provide him with a place to work . 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. Based on the findings in these cases, it is considered that, for employees a place of business will exist 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 was necessary to work from home; and • the area of the home is used exclusively or almost exclusively for income producing purposes In your case the Commissioner does not consider you to be conducting a business from your home. You are performing employee related duties from home. We also consider that your home office is merely a 'private study' and as a result, deductions should be limited to your additional 'running expenses'. In order to show that the room in your home is a place of business you have to satisfy the conditions above. We consider that you do not meet the above conditions because: • The nature of your work does not in itself require you to work from home. There is no specific reason why it is necessary for you to perform your employment duties from home other than one of convenience. • You have an alternative place of business to conduct your duties. Your employer has office space available in the city in which you reside where you would be able to perform the duties of your employment if you chose to do so. Whilst it is acknowledged that you may feel safer working from home after normal office hours, this does not convert your home to a place of business. • We acknowledge that you may use the home office area exclusively for income producing purposes; however as the other two requirements are not met, the room in your house cannot be considered a place of business. As your home office is not considered a place of business, you will not be entitled to a deduction for occupancy costs.