Edited version of your written advice

Authorisation Number: 1051262151572

Date of advice: 01 August 2017

Ruling

Subject: Home office expenses

Question 1

Are you entitled to a deduction for a portion of your occupancy costs in relation to your home office?

Answer

Yes.

Question 2

Are you entitled to a deduction for any portion of your occupancy costs in relation to the kitchen and bathroom areas?

Answer

No.

Question 3

Are you entitled to a deduction for the work related use of your running costs for your home office?

Answer

Yes.

This ruling applies for the following periods

Year ended 30 June 2017

Year ended 30 June 2018

Year ended 30 June 2019

Year ended 30 June 2020

The scheme commenced on

1 July 2016

Relevant facts

You are a professional.

You have been an employee for entity A for several years. Entity A is based interstate.

You previously worked interstate.

You now live in state B. Entity A does not have an office in state B.

Entity A agreed for you to work remotely with the use of electronic communications.

You rent an apartment with a separate room that has been set up as your office/work area.

The separate room is used exclusively for your work and is set up with all the equipment and resources necessary for your work.

You use the apartment’s bathroom and kitchen when necessary during work hours.

You pay weekly rent.

You pay the full amount of rent plus the internet, mobile telephone and electricity costs.

You have provided the furniture and smaller equipment items necessary for your work.

Clients do not come to your home office.

No one else lives in the apartment or uses the home office.

You do not receive any reimbursement or allowance from your employer in relation to your home office expenses.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1.

Reasons for decision

Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 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, or relate to the earning of exempt income, or a provision of the ITAA 1997 prevents it.

A number of significant court decisions have established that, for an expense to satisfy the requirements of section 8-1 of the ITAA 1997:

● It must have the essential character of an outgoing incurred in gaining assessable income or, in other words, of an income producing expense (Lunney & Hayley v. Federal Commissioner of Taxation (1958) 100 CLR 478; (1958) 11 ATD 404; (1958) 7 AITR 166)

● There must be a nexus between the outgoing and the assessable income so that the outgoing is incidental and relevant to the gaining of assessable income (Ronpibon Tin NL v. Federal Commissioner of Taxation (1949) 78 CLR 47; (1949) 8 ATD 431; (1949) 4 AITR 236); and

● It is necessary to determine the connection between the particular outgoing and the operations or activities by which the taxpayer most directly gains or produces their assessable income (Charles Moore & Co Pty Ltd v. Federal Commissioner of Taxation (1956) 95 CLR 344; (1956) 11 ATD 147; (1956) 6 AITR 379 and Federal Commissioner of Taxation v. Hatchett (1971) 125 CLR 494; 71 ATC 4184; (1971) 2 ATR 5570.

A deduction is generally not allowable for the costs associated with a person’s home as they are private in nature (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 the property 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 property may be partly deductible.

Taxation Ruling TR 93/30 Income tax: deductions for home office expenses discusses the deductibility of home office expenses. Home office expenses are divided into two broad categories – occupancy and running expenses. Occupancy expenses relate to the ownership of a home such as rent. Running expenses relate to the use of the facilities within the home such as electricity.

If an area of the home has the character of a place of business, some part of the occupancy expenses may be claimed as a deduction. TR 93/30 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). Another example is where part of the home is used as a taxpayer’s sole base of operations for income producing activities such as where no other work location is provided to an employee by an employer.

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

● the area is clearly identifiable as a place of business,

● the area is not readily suitable or adaptable for use for private or domestic purposes in association with the home generally,

● the area is used exclusively or almost exclusively for carrying on a business,

● the area is used regularly for visits of clients or customers.

The existence of any of these factors or a combination of them will not necessarily be conclusive in determining whether the home constitutes a place of business in the ordinary and common sense meaning of the term. The determination will depend on a balanced consideration of the essential character of the area, the nature of the taxpayer's business and any other relevant factors.

It is not sufficient that a room in the home is used in association with a business. The fact that no other accommodation is available is not of itself sufficient to render a house as a place of business.

In your case, your home office in your apartment is your sole base of operations for income producing activities. Your employer does not have a work location in city C. It is accepted that your home office is a place of business. As your home office is used exclusively for your income producing activities, the associated occupancy costs such as rent for the home office area is an allowable deduction under section 8-1 of the ITAA 1997.

The kitchen and bathroom are not regarded as a home office or place of business. None of the above 'place of business’ factors are met and these rooms retain their domestic character. It is acknowledged that these rooms may be used during the working day, however such use does not change the associated expenses of these rooms from a private expense to an income producing expense. The associated expenses are not expenses incurred in the course of gaining or producing your assessable income. The connection with your assessable income is insufficient. Furthermore the essential character of the kitchen and bathroom is of a private or domestic nature, therefore no deduction is allowed in relation to any associated expenses for the kitchen, bathroom or other rooms of your apartment except for the home office as outlined above.

As only a portion of your rent is allowable, you will need to apportion the expenses using a reasonable basis. Generally, the apportionment is made on a floor area and in addition, on a time basis where the home office is not used for income producing purposes for the whole year.

You are also entitled to the associated running costs for your home office such as electricity and depreciation of office furniture. It is only the additional running expenses actually incurred for your income producing activities that are allowable. The private portion is not an allowable deduction. The portion of costs for the work related use for your internet and mobile phone expenses are also an allowable deduction.

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