Edited version of private ruling

Authorisation Number: 1011592036602

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Ruling

Subject: Deductions - rent expense

Question

Will you be entitled to a deduction for the proposed rent expense you will incur under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Advice/Answers

No

This ruling applies for the following period:

Year ended 30 June 2011

The scheme commences on:

1 July 2010

Relevant facts and circumstances

The Taxpayer is a medical practitioner and partner at Clinic X in `Town A'.

The Taxpayer currently resides at `Town A'.

The Taxpayer and spouse propose to dispose of their current residence in `Town A' and build a new home in `Town B'.

The Taxpayer will continue to practice medicine as a partner at Clinic X and commute between `Town A' and `Town B' after the new home is built.

It is proposed that a small house or unit be acquired in `Town A' by the Family Trust during the interim period between the current home being sold and the new residence in `Town B' being built.

Rental income on a commercial basis will be derived by the Trust and expenses claimed whilst the Taxpayer and spouse reside in the property as their home.

It is proposed that once the property at `Town B' is completed and the Taxpayer and spouse take up permanent residency in that property as their home, that the Trust will continue to rent the house or unit to the Taxpayer when they are on call after hours for the practice and report both income derived and expenses incurred in relation to that property for the period it is being used for income producing purposes.

It is proposed that the Taxpayer will claim the rent paid as a tax deduction.

The "on call" arrangement of the Taxpayer for the particular month was as follows:

The Taxpayer is one of the partners at Clinic X who provide accident and emergency on call services.

The practice provides a small team 24 hours a day all year to cover the accident and emergency calls at Hospital X and to be available in the event of an emergency caesarean section.

The Taxpayer has three procedural areas of skill.

In the particular month in the recent year the Taxpayer was an on call doctor on X separate days, X of which were weeknights and three on weekends.

On those nights where the Taxpayer was on call for accident and emergency (three nights of the month), the taxpayer was called into the hospital and spent a minimum of three of the hours from 8pm to 8am in the hospital.

The Taxpayer may be called in several times each night as patients present randomly to the accident and emergency department.

Weekend call is in six hours rostered shifts during the day and 12 hours overnight as first on for accident and emergency but the remainder of the time over the weekend is spent providing cover for two other specialist medical services (Service Y and Service Z).

Clinic X is the only clinic in `Town A'.

The Taxpayer is also the Service Y on call person (nights) and will be called in on at least 50% of the nights spending from 1-5 hours per patient.

As the Service Z person on call the Taxpayer is usually only called if there is a certain medical procedure to provide Service Z skills, but is available as the resuscitation and airway management expert to be called for cardiac arrest, trauma or emergency surgery. The Taxpayer feels that they need to be available within ten minutes of being summoned.

In all instances prior to driving to the hospital, nursing staff are given detailed instructions on how to manage the patient.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Reasons for decision

Issue 1

Question 1

Summary

As the proposed rent expense you would incur will be of a private and domestic nature you will not be entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997).

Detailed reasoning

Discussion of law

Section 8-1 of the ITAA 1997 states:

(1) You can deduct from your assessable income any loss or outgoing to the extent that:

(a) it is incurred gaining or producing your assessable income; or

(b) it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income.

(2) However, you cannot deduct a loss or outgoing under this section to the extent that:

(a) it is a loss or outgoing of capital, or of a capital nature; or

(b) it is a loss or outgoing of a private or domestic nature; or

(c) it is incurred in relation to gaining or producing your exempt income; or

(d) a provision of this Act prevents you from deducting it.

An expense is deductible if it fits into one of the positive limbs of subsection 8-1(1) of the ITAA 1997. However, subsection 8-1(2) of the ITAA 1997 will prevent deductibility if the incurred expenditure fits into one of the negative limbs of that section. Therefore even if the expenses can be shown to be for the purpose of producing assessable income, they would still be disallowed due to being of a private or domestic nature.

As a general rule, expenditure on meals and accommodation while away from home cannot be deducted under section 8-1 of the ITAA 1997. Such outgoings are essentially "living expenses" of a private or domestic nature. In Federal Commissioner of Taxation v. Green (1950) 81 CLR 313 at pp 317-318, the Full High Court observed:

It is not enough in order to establish a right to a deduction to show that it was proper or reasonable for the taxpayer to make the expenditure which he claims as a deduction. For example, it is perfectly reasonable and proper for a taxpayer to incur living expenses and many expenses of a private or domestic nature but such expenditure is expressly excluded from deductibility …... Thus … a taxpayer cannot deduct ordinary living expenses. It is true that such expenses are necessarily incurred if any income is to be earned or otherwise derived, but such expenses would be incurred whether income was earned or otherwise derived or not.

Similar comments were made in Ricketts v. Colquhoun (1926) 10 TC 118, by Viscount Cave LC when he observed (at p 134):

a man must eat and sleep somewhere, whether he has or has not been engaged in the administration of justice. Normally he performs those operations in his own home, and if he elects to live away from his work so that he must find board and lodging away from home, that is by his own choice, and not by reason of any necessity arising out of his employment, nor does he, as a rule, eat or sleep in the course of performing his duties, but either before or after their performance.

As Mason J. put it in FC of T v. Faichney 72 ATC 4245 at p. 4249, "Examples of expenditure of a private or domestic nature which leap to the mind are those which could not conceivably be incurred in gaining assessable income, eg. the expense of private entertainment or rent paid for the taxpayer's dwelling".

Deductibility of accommodation expenses was considered in Case X4 90 ATC 116 (Case X4), where the taxpayer who was a specialist radiologist with a practice in a town which was over 100 kilometres from the capital city he travelled to regularly to attend professional obligations, which included honorary appointments at various hospitals and teaching commitments.

The specialist radiologist decided to purchase a home in the capital city so that he would have a base there, and claimed expenses related to the ownership of the house such as rates, power and telephone expenses, insurance and repair costs. These expenses were disallowed by the Commissioner in full.

The Administrative Appeals Tribunal held that the taxpayer had created a home away from home. He did not want to stay in hotels and preferred to have his own premises with his own facilities and the expenses were therefore of a private or domestic nature and not deductible. Furthermore, even if the expenses could be shown to be of the purpose of producing assessable income, they would still be disallowed due to being of a private or domestic nature.

Private living expenses may be deductible when they are associated with travelling. However as in Lunney & Hayley v. Federal Commissioner of Taxation (1958) 100 CLR 478 (Lunney and Hayley) travel expenses and associated expenses, such as accommodation expenses, are not deductible for income tax purposes where they are incurred in travelling from home to work.

Furthermore, in Federal Commissioner of Taxation v. Payne (2001) 202 CLR 93; 2001 ATC 4027;(2001) 46 ATR 228 (Payne case), it was held that travel expenses (and associated accommodation expenses) would only be allowable if they were incurred `travelling on work'. This means that the taxpayer has commenced the income producing activity before the trip has started and it does not cease until the trip is completed. An example of this would be a trip made by a home based salesperson that travels widely to sell their products.

Application of the law to your circumstances

As in Case X4 your decision to dispose of your current residence in `Town A' and build a new home in `Town B' in which to reside is a personal choice. The expense is dictated not by your work but by private considerations. The fact that you will need to travel back to your place of work and seek to dwell in a second residence whilst on call is a result of this choice. Similarly to Case X4 you will have created a home away from home.

Your main residence will be in `Town B' from where you will travel to your `Town A' residence and then to your work. All of this travel and the associated accommodation expenses occur after you will leave `Town A' but before you begin work. The expenses would thereby be incurred travelling from home to work as in Lunney and Hayley.

Furthermore, you will not be considered to be travelling on work so the Payne case will not apply.

Conclusion

There is not a sufficient connection between the rental expense and your income producing activities. The expenses incurred are a prerequisite to the earning of your assessable income and incurred in order to enable you to earn income but are not incurred in the course of gaining or producing that income.

The rental expense represents an additional cost for you to continue working at your present workplace in `Town A' after choosing to move away. As the rental expense will arise from your choice to move residence and not by reason of any necessity arising out of your employment the expense will be of an inherently private and domestic nature and the rent expense will not be an allowable deduction under section 8-1 of the ITAA 1997.

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