Edited version of private advice

Authorisation Number: 1052237812618

Date of advice: 24 April 2024

Ruling

Subject: Deductions - occupancy expenses

Question

Can you claim a deduction for the expenses you incurred to rent a granny flat to work from under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

This ruling applies for the following period:

Year ended XX XXXX 20YY

The scheme commenced on:

XX XXXX 20YY

Relevant facts and circumstances

You were employed as a university lecturer.

In early XXXX, the campus you were employed at went into shutdown due to COVID-19 restrictions.

You were required to work away from campus during this period of shutdown.

On XX XXX XXXX, you received an email from the university stating that there were additional restrictions and they advised you not to attend campus.

On XX XXX XXXX, you received an email from the university stating the following:

•         From XX XXX XXXX to XX XXX XXXX, all courses and assessable tasks including labs, practical and studio classes will continue online.

•         Staff and students should continue to work and study from home. We will however allow staff and students who cannot work or study from home to return to campus in certain circumstances.

In XXX XXXX, you had a newborn child.

You decided to rent a granny flat close to home as it was difficult to work efficiently with a newborn child in your home.

The granny flat was used exclusively for income producing purposes.

At the time of working away from campus you had the following responsibilities connected to your employment:

•         You were supervising/co-supervising several PhD and masters' students.

•         You were working on a grant application. This involved several academics and required meetings to put it together.

•         You were conducting research tasks based on your successful grant. This application involved several academics from Australian universities.

On XX XXX XXXX, you received an email from the university stating that from XX XXX XXXX:

•         If you are vaccinated or medically exempt, you will be allowed on campus.

•         If you are unvaccinated and wish to be on campus, you will be required to register with your manager or supervisor and provide evidence of a negative PCR test result per the campus policy.

You decided to continue working from the granny flat because you did not want to risk yourself getting the virus when you had a newborn child at home.

All university classes were online at the time, and you were allowed to continue working away from campus.

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 except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income.

Paragraph 13 of TR 2020/1 Income tax: employees: deductions for work expenses under section 8-1 of the Income Tax Assessment Act 1997 provides that the pivotal element of section 8-1 for work expenses is the requirement that expenses be incurred 'in gaining or producing assessable income'. The High Court majority in Commissioner of Taxation v Payne [2001] HCA 3 said it is well established that these words are to be understood as meaning incurred 'in the course of' gaining or producing assessable income, and do not convey the meaning of outgoings incurred 'in connection with' or 'for the purpose' of deriving assessable income.

The majority further stated that the meaning of 'in the course of' gaining or producing income was amplified in Ronpibon Tin NL v Commissioner of Taxation (Cth) [1949] HCA 15 where it was held that:

... to come within the initial part of [section 8-1] it is both sufficient and necessary that the occasion of the loss or outgoing should be found in whatever is productive of the assessable income, or if none be produced, would be expected to produce assessable income...

Paragraph 9 of TR 93/30 discusses the cases Thomas v FC of T [1972] and FC of T v Faichney [1972] HCA 67, which provide that expenses that relate to the use or ownership of a home (or to facilities in it) normally have a private or domestic character and are not allowable deductions under section 8-1. However, in certain circumstances, part of these expenses may be allowed as a deduction. The allowable deductions will depend on whether an area of the home has the character of a place of business or is merely a private study.

COVID-19 - frequently asked questions explains that occupancy expenses relating to your home - such as rent, mortgage interest, property insurance and land taxes - will not become deductible merely because you are required to temporarily work from home due to COVID-19.

Additional expenses incurred while working from home due to the COVID-19 pandemic are addressed in Practical Compliance Guideline PCG 2020/3 Claiming deductions for additional running expenses incurred whilst working from home due to COVID-19.

Paragraph 5 of PCG 2020/3 provides occupancy expenses are only deductible if part of the home has the character of a place of business. Whether part of an employee's or business owner's home has the character of a place of business or is a private study is covered in Taxation Ruling 93/30 Income Tax: deductions for home office.

Place of Business

Paragraph 5 of TR 93/30 provides the following factors may indicate whether 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; or

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

Paragraphs 11 to 13 of TR 93/30 provide further explanation regarding when an area of a home is a place of business rather than a private study. Paragraph 11 of TR 93/30 lists the following factors which may indicate that a part of the home has the character of a place of business:

•         the essential character of the area

•         the nature of the taxpayer's business

•         any other relevant factors.

Paragraph 12 of TR 93/30 provides that the absence of an alternative place of work has influenced court and tribunal decision to accept a part of an employee's home is a place of business. However, as per paragraph 13 of

TR 93/30, an employee must be able to show:

•         it is a requirement inherent in the nature of the taxpayer's activities that the taxpayer needs a place of business

•         the taxpayer's circumstances are such that there is no alternative place of business and it was necessary to work from home

•         the area of the home is used exclusively or almost exclusively for income producing purposes.

Application to your circumstances

Your employer provides you with a place to work on campus. Although you were unable to attend campus at certain times due to COVID-19 restrictions, you did have a place to work.

From XX XXX XXXX, your employer gave you the option to work on campus in certain circumstances. You rented the granny flat after this date because you had a newborn child which made it difficult for you to work from home. You also didn't want to return to working at campus because you did not want to risk getting COVID-19 and passing it onto your newborn child.

Although you used the granny flat exclusively for income producing purposes, it was not a 'place of business' in accordance with TR 93/30. In particular:

•         the granny flat was not clearly identifiable as a place of business and the nature of your employment activities didn't require you to have a place of business

•         the area was readily adaptable for use for private and domestic purposes, by its nature it was residential accommodation that could be rented and used as a home

•         there was an alternative place of business for you to work from so it was not necessary for you to rent the granny flat.

It was your private decision not to return to your place of work to avoid contracting COVID-19. Therefore, the rent expenses were not incurred in the course gaining or producing your assessable income and they are also private in nature.

Based on the above, you cannot claim a deduction for the expenses you incurred to rent a granny flat under section 8-1 of the ITAA 1997.

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