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Edited version of your private ruling
Authorisation Number: 1012565756129
Ruling
Subject: Deductibility of the cost of kitchen renovations and equipment
Question 1
Can you claim a portion of the capital works costs for renovations to your residential kitchen to include extra cupboards and modifications to the kitchen to accommodate new equipment?
Answer
No.
Question 2
Can you claim a portion of the depreciation on new equipment, such as a dish washer, hot plates and oven, to be installed in your residential kitchen and used partly to derive assessable income?
Answer
Yes.
This ruling applies for the following period
Year ended 30 June 2014
The scheme commenced on
1 July 2013
Relevant facts
You operate a business that includes the provision of food to clients at outside locations.
Cooking in the unit (which you own and live in) is required. You need to upgrade your private kitchen so you can prepare food for much larger numbers.
No change in private kitchen would be needed if not for new business. You need more cupboards for ingredients, a bigger dish washer and more hot plates and better oven than you have at present.
The current kitchen is X years old and built to accommodate the current equipment. The kitchen structure will have to be modified to accommodate the new equipment. The cupboards will be part of the kitchen and screwed to the wall.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 43-20
Income Tax Assessment Act 1997 Section 43-170
Income Tax Assessment Act 1997 Section 40-25
Reasons for decision
As a general rule, expenses associated with a taxpayer's home are of a private or domestic nature and do not qualify as deductions for taxation purposes. An exception to this general rule is where part of the home is used in connection with the taxpayer's income earning activities but does not constitute a place of business. In this case, a limited range of deductions may be available (depreciation, running expenses).
Capital Works
The cost of renovations to your residential kitchen to include extra cupboards and modifications to the kitchen structure to accommodate new equipment is considered expenditure on capital works. These items are either considered to have the character of essential building fixtures (Taxation Case 11/97 97 ATC 173) or they are an integral part of the property (Imperial Chemical Industries of Australia and New Zealand Limited v FC of T (1970) 120 CLR 396). This is because they cannot be detached without causing damage either to the item or to the building. The income-producing portion of the costs of these capital works is capital expenditure (section 43-20 Income Tax Assessment Act 1997 [ITAA 1997]) and in some circumstances could be eligible for a special building write-off.
However, section 43-170 of the ITAA 1997 denies a deduction for capital works where a part of the capital works is for use mainly for, or in association with, residential accommodation.
As your kitchen is used in association with residential accommodation and will be used as a kitchen for domestic/private purposes, the capital works costs of renovations to your residential kitchen to include extra cupboards and modifications to the kitchen structure to accommodate new equipment are not allowable deductions.
Depreciation
You are entitled to claim deductions for the decline in value of depreciating assets which are used, or installed ready for use, for a taxable purpose. In the case of depreciating assets used in the home, taxable purpose means the purpose of producing assessable income. Part of your business activity is to supply meals on a vessel. You will be using kitchen facilities, such as the dishwasher, hotplates and stove in your unit to prepare these meals. These types of equipment are considered to be depreciable assets. The equipment will be used partly for income producing purposes and partly for private purposes.
Where items used for business purposes are also utilised for domestic purposes, you will need to reduce your deductions for the depreciating asset's decline in value in proportion to the extent that the assets are used for other than a taxable purpose.
You have stated that no change in the private kitchen would be needed if not for the new business. This does not affect the apportionment calculation. The new facilities are still part of a kitchen in a private residence and will be used in this manner. The apportionment should be on a usage basis.
Guidance on this apportionment is set out in ATO Practice Statement Law Administration PS LA 2001/6. You should also take into account seasonal usage of equipment and if usage increases or decreases as your business changes.
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