Private ruling: Business expenses - Main residence - apportionment
Published: May 2013
Ruling period: Year ended 30 June 2014
Date scheme commenced: 1 July 2011

Ruling: Q1: Are the business expenses that you incur in carrying on your business deductible? | A1: Yes | Q2: Can you apportion the expenses incurred in relation to the main residence and the business workshop according to floor space? | A2: Yes

Relevant facts and circumstances: Your own a property. Your property is comprised of your main residence and a separate business workshop. The business workshop has the following characteristics of a business premises: · materials get delivered to the workshop; · it is clearly identifiable as the place of business; · it is not readily suitable or adaptable for private or domestic purposes; and · it is used exclusively for carrying on the business. The business workshop has separate driveway access to it.

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

Reasons for decision: Summary: The business would be entitled to claim any expenditure incurred in relation to your property for one third of the occupancy expenses (based on floor space), including the local council rates, electricity, and any other expenses incurred in running the business. | Detailed Reasoning - Deductibility of business expenses: Under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) you can claim deductions for expenses 'to the extent' they are incurred in gaining or producing your assessable income, or they are necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income. You cannot claim deductions under section 8-1 of the ITAA 1997 for expenses 'to the extent' to which they are of a capital, private or domestic nature or they are incurred in gaining or producing exempt income. The phrase 'necessarily incurred' does not mean that the expense was unavoidable or logically necessary. The expense must be clearly and appropriately adapted for the ends of the business. Taxation Ruling TR 93/30 - Income tax: deductions for home office expenses considers the issue of home office expenses. 15. The expenses that may be associated with a home office or study can be divided into two broad categories. These are: * Occupancy expenses relating to ownership or use of a home. These include rent, mortgage interest, municipal and water rates and house insurance premiums. * Running 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. In your circumstances, you carry on a business from a workshop on the same property as your main residence. Your business workshop has the characteristics of a business premises. Therefore, you are entitled to deduct expenses associated with the running of your business from your property, apportioning the eligible expenses to account for the separate business and main residence costs. | Detailed Reasoning - Apportionment: TR 93/30 explains that: 7. If an area of the home has the character of a place of business as outlined in paragraph 5, some part of the expenses from both categories may be claimed as a deduction. In most cases the apportionment of expenses should be made on a floor area… Paragraph 13 of TR 93/30 states: 13. In circumstances such as those referred to in paragraph 12, 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 circumstances, the business workshop is used exclusively for running the business, and the workshop has a separate driveway to the main residence. In accordance with TR 93/30, you should apportion deductible expenses relating to the business based on floor space. You have advised that the business occupies one third of the floor area of the main residence (although these are separate structures). Therefore, one third of the home occupancy expenses would be allowable business expenditure, as they relate to the carrying on of your business.