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Ruling

Subject: Home office expenses

Question 1

Are you entitled to a deduction for the running expenses of your home office using the cents per hour method?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 2013

The scheme commences on:

1 July 2012

Relevant facts and circumstances

You are a performing artist.

You spend time each week rehearsing.

You spend additional time each week on promotion, marketing, and also responding to emails and other administrative work.

You use your bedroom as your rehearsal space.

There are no other persons present when you rehearse.

You incur costs for electricity.

You will keep a diary for a four week period detailing your hours of rehearsal.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Reasons for decision

Section 8-1 of the Income Tax Assessment Act 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.

Normally, costs associated with a taxpayer's home are of a private or domestic nature (Federal Commissioner of Taxation v. Faichney (1972) 129 CLR 38; 72 ATC 4245; (1972) 3 ATR 435) and do not qualify as allowable deductions because they do not satisfy the requirements of section 8-1 of the ITAA 1997.

However, in circumstances where a taxpayer is using part of a home for work purposes, a deduction for a proportion of costs associated with the home may be allowable.

Taxation ruling TR 93/30 provides the Commissioners view on the deductibility of home office expenses.

Running expenses are those costs related to the use of facilities in the home which may be affected as a result of income producing activities. That is, the expenditure actually incurred through the income producing activity is additional to the taxpayer's private expenditure. Such costs include heating, cooling and lighting expenses, cleaning costs, depreciation, and the cost of repairs of furniture and furnishings in a private study or office of convenience.

To claim any additional running costs relating to a private study or office of convenience, a taxpayer must be able to show that the extra costs incurred relate to facilities provided exclusively for the taxpayers benefit while working from home. For example, if a taxpayer merely sits in the lounge room with his or her family and at the same time does some work related activity, the expenditure for lighting and heating/cooling retains its private or domestic character.

In most cases the amount of the allowable deduction will be small and apportionment of costs incurred is necessary.

The Commissioner's view on the calculation of the running expenses is that there are two methods which are acceptable. The first method is to claim the actual expenses incurred. The second method is to use a fixed rate of 34 cents per hour of employment use for costs such as heating, cooling and lighting. Where expenses are incidental a deduction would not be allowable. For example, a deduction would not be allowed at the rate of 34 cents per hour for the home office simply because a facsimile machine is left on 24 hours a day 7 days a week to receive business documents.

Diary records noting the time the home office was used for work are acceptable evidence of a connection between the use of a home office and your income producing activities. The Commissioner will accept diary records covering a representative four week period as establishing a pattern of use for the entire year. You may then use this pattern of home use to calculate the running expenses claim for the entire year, allowing for periods when the home is not used for income production, such as holidays and illnesses.

In your case, you are a performing artist. You use your bedroom to rehearse. There is no one else present while you practice. Therefore, you are entitled to a deduction for the additional running expenses incurred for your home office. Provided that you keep acceptable evidence, you are entitled to use the 34 cents per hour method to calculate the amount of your deduction.