Edited version of private advice

Authorisation Number: 1052367729151

Date of advice: 06 March 2025

Ruling

Subject: Work related expenses

Question 1

Are you entitled to a deduction for a portion of your home office occupancy expenses under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer 1

No.

Question 2

Are you entitled to a deduction for a portion of your home office running expenses under section 8-1 of the ITAA 1997?

Answer 2

Yes.

This ruling applies for the following period:

30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You are employed.

Your position is full-time.

Your employer operates in State A, State B and State C.

Your employer requires you to perform your job duties from home, as they are unable to provide an option to work from an office or any alternative location.

You live and work in State B in a X bedroom apartment.

Your workspace is setup in an open area of your dining room, which is part of the open-plan living space. The workspace does not have 4 walls around it, blending seamlessly with the rest of the room.

The workspace consists of:

•                     desk

•                     chair

•                     computer

•                     large screens

•                     printer

Since DD MM 20XX, you have worked solely from your home.

You want to claim the following occupancy expenses:

•                     rent

•                     water

•                     home insurance

You want to claim the following running expenses:

•                     electricity

•                     gas

•                     internet

•                     mobile phone

•                     stationary

The total floor area of your home is X square metres.

The dwelling internal floor area is X square metres.

The veranda is X square metres.

Your workspace area is X square metres X square metres.

Clients do not attend your place of residence where you conduct your work in your workspace.

Clients do contact you through a business phone where you conduct your work in your workspace.

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 Taxation Ruling TR 2020/1 (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 Taxation Ruling TR 93/30 (TR 93/30) Income tax: deductions for home office expenses 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.

Paragraph 10 of TR 93/30 further states that in deciding cases concerning home office expenses, courts and tribunals have consistently drawn a distinction between cases:

•                     where part of a home can be characterised as a place of business; and

•                     where a room is used as a study or home office merely as a matter of convenience.

The reason this distinction is important is that if an area of the home has the character of a place of business then expenses associated with that part of the home can be said to take on a business or businesslike character and are allowable deductions [Swinford v FC of T (1984) 15 ATR 1154; 84 ATC 4803 (Swinford's Case)]. In effect, the area used loses its domestic character.

Paragraph 13 of TR 93/30 states that in circumstances such as those referred to in paragraph 12, a place of business will exist only if:

•                     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; and

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

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 a court and tribunal 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.

Private study

Paragraph 14 states the circumstances where part of a home is considered to have the character of a place of business can be contrasted with the more common case where a taxpayer maintains an office or study at home as a matter of convenience (i.e., so that he or she can carry out work at home which would otherwise be done at his or her regular place of business or employment). Examples of this include:

•                     a barrister who reads client briefs at home;

•                     a teacher who prepares lessons or marks assignments at home; and

•                     an insurance agent who maintains client files and occasionally interviews a client in his or her home office.

In these circumstances the area of the home and the expenses incurred retain their private or domestic character (Handley v FC of T (1981) 11 ATR 644; 81 ATC 4165 (Handley's Case) and Forsythe v FC of T (1981) 11 ATR 657; 81 ATC 4157)

If an area of the home has the character of a place of business as per the criteria set out in paragraph 5 of TR 93/30, then a portion of occupancy expenses and running costs under section 8-1 of ITAA 1997 will be allowable. However, where an area of the home is simply used in connection with income producing activities but does not have the character of a place of business, then only additional running expenses attributable to the income-producing area of the home will be allowable.

In Case Q92 83 ATC 461 (Case Q92), an Inspector of Schools who used his home as a base of operations for his job was also denied a deduction for insurance, mortgage interest and rates. The taxpayer used his home as an office because there was no space within his district that he could use even if he had been required to. He had set aside an area of his home where office equipment and records were kept. His home address and telephone number were listed as his office-residence. The Board of Review held that the expenses claimed were domestic in character. The Chairman Mr Stevens said at 463:

The expenditure involved retains, in my view, the essential characteristic of being in relation to the provision of a home and, as such, not allowable in terms of subsection 51(1)...I do not think that the use by an employee of his home as -his base of operations- (even if not purely or mainly for his own benefit or the result of his own choice) makes it, or a portion thereof, analogous to a doctor's surgery that is part of the doctor's residence.'

Application to your circumstances

Your circumstances can be distinguished from the cases where the courts and tribunals have accepted that a taxpayer's residence is a place of business as you have set up an office area in an open area of your residence to conduct your income earning activities. Your circumstances are similar to Case Q92 in that the business you provide services to has no commercial business premises. You have set up an office area at your residence where office equipment and business records, stationary and equipment are kept. In applying the criteria noted at paragraph 5 of TR 93/30, it is considered that:

•                     the area is not clearly identifiable as a place of business. While the clients of the business can contact you through the business telephone number, there is no indication that there is anything from the outward appearance of your residence that it is a place of business

•                     the office area is part of the open area which is readily suitable for private use

•                     you carry out the work activities for the business at your residence. However, the open area is not used exclusively for income producing purposes

•                     clients of the business do not visit your place of residence.

Therefore, the essential character of the office area you have set aside to perform your income earning activities is not considered to be a place of business.

You will not be entitled to a deduction for a portion of your occupancy expenses, such as rent, water and home insurance under section 8-1 of the ITAA 1997.

However, since you do perform income producing activities at home, you will be entitled to a deduction under section 8-1 of the ITAA 1997 for the running costs of your home office to the extent that the costs incurred relate to your income earning activities.

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