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Edited version of your private ruling

Authorisation Number: 1012337214810

Ruling

Subject: Home Business occupancy expenses

Question:

Can you claim a deduction for a portion of rental expenses incurred while using your residential house as a home business?

Answer:

No.

This ruling applies for the following periods:

Year ended 30 June 2012

The scheme commences on:

1 July 2011

Relevant facts and circumstances

You commenced a fulltime business and have no other employment.

You are registered with your local council.

You estimate that X% of your house is used for your business. You also use home appliances in your business.

You do not have signage to identify your house as a business.

You reside in the residence with your spouse and child.

You care for less than 10 children from morning until night daily, except weekends.

You incur rental expenses while occupying the house.

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 or are necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature.

The costs associated with a taxpayer's home are normally of a private or domestic nature and do not qualify as deductions for taxation purposes (Federal Commissioner of Taxation v. Faichney (1972) 129 CLR 38; 72 ATC 4245; (1972) 3 ATR 435).

An exception to this general rule is where part of the home is used for income producing activities and has the character of a 'place of business'. In such cases some of the expenses incurred in respect of the home such as rent may be partly deductible.

Taxation Ruling TR 93/30 discusses the deductibility of home office expenses. The principles can be applied to other instances in which income producing activities are undertaken in a taxpayer's principal residence. TR 93/30 also provides guidelines as to when an area of the home has the character of a place of business.

Whether an area of the home has the character of a place of business is a question of fact which depends on the particular circumstances of each case. This is likely to be the case where a part of a residence is set aside exclusively for the carrying on of a business by a self employed person (for example, a doctor's surgery).

The following factors may indicate whether or not an area set aside has the character of a 'place of business':

IT 2673 also discusses situations in which income producing activities are undertaken in a sole or principal residence. Paragraph 12 states that the test of a 'place of business' would not be satisfied in this situation where, within limits, children who are being cared for are treated more or less as members of the care giver's family.

If there is an area set aside exclusively for the business activity then one can generally claim rent expenses provided the area set aside has the character of a place of business. If one does not have an area set aside exclusively for business then one can not claim rent expenses.

Where the area used is a place of business, occupancy expenses such as rent which are associated with that part of the home take on a business or businesslike character and are allowable deductions. The area used loses its domestic character.

In this situation, the most common problem is to determine the amount, if any, of the cost which is allowed as a deductible expense, especially where costs relate to both private and business activities. No deduction is available for purely private expenditure.

An expense is fully deductible when it is incurred exclusively for your business activity. That is where one's family do not receive any benefit from the expense.

Application to your circumstances

It is acknowledged that you provide supervision and care in your own home and use much of your home for this purpose. However there is no area of your home that is set aside exclusively for the business.

The area is not clearly identifiable as a place of business, and you have no signage to identify your home as a business.

The area used in the business is readily suitable, adaptable and used for private or domestic purposes in association with the home generally.

Consequently, you are not entitled to claim a deduction for rental expenses incurred in respect of the home.

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