Edited version of private ruling

Authorisation Number: 1011610136072

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Ruling

Subject: Deduction-storage expenses

1. Are you entitled to a deduction for a portion of rental expenses for a storage room at your main residence?

No.

2. Are you entitled to a deduction for a portion of running expenses in relation to a storage room at your main residence?

Yes.

3. Are you entitled to a deduction for the decline in value of the free standing book shelves? 

Yes.

This ruling applies for the following period

Year ended 30 June 2010

The scheme commenced on

1 July 2009

Relevant facts and circumstances

You operate a business in partnership with a friend.

The partnership leased commercial premises.

The commercial premises do not have enough floor space to store all stock.

You use a spare room at your place of residence to store stock.

You pay rent to a landlord to live in the property.

You use the spare room exclusively for storing stock as the room is not used for any other purpose.

You live on your own and no one else has access to the room.

You have built and installed free standing shelves in this room at your own cost.

You have not been reimbursed for the cost of the shelving and rent incurred in relation to your place of residence.

There is no other furniture in the room.

Clients or customers do not visit the spare room.

You receive a distribution from the partnership which is included in your income tax return.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 section 40-25

Income Tax Assessment Act 1997 subsection 40-25(7)

Reasons for decision

For a deduction to be allowable for home office expenses, the expenses must satisfy the requirements of section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997). Section 8-1 of the 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 to the extent that the outgoings are of a capital, private or domestic nature.

As a general rule, any expenses incurred, which are, associated with a taxpayer's home are of a private or domestic character (Thomas v. FC of T 72 ATC 4094; (1972) 3 ATR 165 and Federal Commissioner of Taxation v. Faichney (1972) 129 CLR 38; 72 ATC 4245; (1972) 3 ATR 435 (Faichney Case)). Therefore, they are not deductible pursuant to section 8-1 of the ITAA 1997.

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 Swinford v FC of T 84 ATC 4803; (1984) 15 ATR 1154 (Swinford Case) the Supreme Court accepted a part of a taxpayer's residence as a place of business in the absence of an alternative place for conducting income producing activities. In that case, a full-time professional scriptwriter who worked exclusively from home in a room set aside for writing was found not to be using the 'home office' as a matter of convenience. It was the only place where she carried out her writing activities and was the only base of her operations.

Taxation Ruling TR 93/30 explains the situations where an area of the home is considered to be a place of business. In such cases some of the expenses incurred in respect of the home such as rent, interest, repairs, house and contents insurance, rates and property taxes may be partly deductible.

The following factors, none of which is necessarily conclusive on its own, 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 business, or

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

In your case, you are a partner in a partnership which operates a business. The partnership leases space where the partnership derives its gross income from the sale of it trading stock. It is considered that the only business activity of the partnership that has been identified, consists of the operation of store. You receive a distribution from the partnership which is included in your income tax return.

You have incurred rental expense in relation to your main residence. For a deduction to be allowed for the rental expense it is necessary to show that the area of the home is actually used as a place of business for income producing purposes. It is not sufficient that a room in the home is used in association with an employment or business conducted elsewhere. The following factors as noted above will be applied to your circumstances:

i).The area is clearly identifiable as a place of business.

There has been no indication that there is anything to indicate from the outward appearance of the residence that would indicate that it is a place of business.

ii). The area is not readily suitable or adaptable for use for private or domestic purposes in association with the home generally.

The storage of the stock does not permanently change the nature of the space so that it cannot be used for domestic purposes.

iii). The area is used exclusively or almost exclusively for carrying on business;

The main business activity of the partnership is the operation of the store. You are a partner in the partnership where there is no business activity carried on in the home. It is only the storing of stock that is done at your home. The business activity is the sale of it trading stock. This point is supported by the discussion in the cases below.

iv). The area is used regularly for visits of clients or customers.

Clients and customers do not visit your place of residence.

The application of these factors in your case indicates that the essential character of the home is a place of residence rather than a place of business.  

These cases noted below are similar to your circumstances.

In Case 12,352; Hinch & Federal Commissioner of Taxation, Re 37 ATR 1128; 97 ATC 2171 (Hinch's case) the taxpayer was the manager of two restaurants and later a sales manager of a jeans company. The restaurants were owned and operated by a company in which the taxpayer was a shareholder and director. The taxpayer claimed that there was no appropriate workplace available at the restaurants and it was necessary to do such work at home.-

In Hinch's case there were two rooms in which the area was devoted solely to a home office where the above duties were carried out and some space was also used for storage. The type of duties carried on at home were of an administrative type not the actual business activity which is similar to your case.

Because the residence was purchased as a residence to be used jointly to live in, it was considered that the essential character of the interest expense related to the purchase of the residence. The expense was also disallowed because the residence was not considered to be a place of business and no income was derived and there was no expectation of deriving income from the restaurant business.

Case 7/94, 94 ATC 170 (Case 7/94). The taxpayer, a specialist medical practitioner, worked in private practice in consulting rooms rented at three hospitals, and also worked at a public hospital. The taxpayer conducts his practice through an incorporated medical practice which employed him and also employed his wife part-time as a secretary. He maintained his practice records, patient records and all administrative facilities at a home office, and also kept equipment there.

The deduction was disallowed because the essential character of the expenditure was for the provision of a home for his family. The taxpayer's home could not be described as a place of business. The applicant normally spent between one and two hours each week night in his study and some hours during the weekend, averaging 12 to 13 hours performing duties such as reviewing and preparing reports, make telephone calls to patients, hospitals and other doctors, complete research and prepare lectures to be presented at the hospital and maintain patient files. It was argued that the home was a place of business of the applicant, because that is where the practice is based, that is the location where patient and billing records are located and no other premises are available to the applicant.

The conclusion was whilst it may have been the central base where he retained files, patient records, and so on, it would be stretching the description of a 'place of business' to say that he carried on a business at his home address.

The activities carried on at the home in Case 7/94 are greater than those carried on at your main residence but the home in Case 7/94 was not considered to be a place of business.

In Faichney's Case the comment was made:

A study in a taxpayer's home, no matter how great the extent of its dedication in point of pursuit of those activities from which the taxpayer earns his income, is a part of that home. 

The home has to be considered a place of business, that is, the business activity must be conducted at the home (not associated activities) for the expenses to be allowable.

In AAT Case 49/94 94 ATC 429; Case 9749 (1994) 29 ATR 1138 (Case 49/94) the taxpayer was employed as a sales representative by a company. His work was mainly on the road.

From 1 July to 30 September 1990 the company shared an office with another organisation. The office provided secretarial services but had no storage facilities. The taxpayer would call in to the office to collect messages, and the company would either send goods directly to the customers or the taxpayer would deliver them. He was obliged to store some of his employer's goods at his home unit.

After 30 September 1990, the company communicated with the taxpayer at his home by telephone or by facsimile machine which it provided.

The Commissioner disallowed the taxpayer's deduction claims for interest, rates, body corporate fees and insurance for the period 1 July to 30 September 1990 on the basis that the company operated its business from the office during that period and not from the taxpayer's home. The taxpayer argued that during those three months he had two offices. He claimed that he was required to receive emergency calls at his home at all hours. The Commissioner had accepted his deduction claim for the use of his home telephone for business during the period.

The taxpayer claims were disallowed as there was no evidence that the space used for storage and the space where the telephone was installed were dedicated to the business and separated from the rest of the home unit. Nor was there evidence that the body corporate fees and interest on the loan for the unit were affected by the fact that the goods were stored on the premises or that the telephone was used for carrying out the company's business. Accordingly, no part of liability for the interest or the body corporate fees was necessarily incurred by the taxpayer in earning his income and, therefore, the home office expenses claimed were not deductible.

As noted in Case 49/94 SA Forgie said at page 433:

…the goods were stored at there but the storage of some of the employer's goods does not of itself make that the place in which a person works or carries on his or her business. It may be an incident of the fact the he is employed or carries on a business but no more.

In your case, the business activities are considered to be carried out at the premises and it is only the associated activity of storing some trading stock that is carried on at home. It does not matter about the extent of the activities it is the nature that is important. There is no evidence of any other business activity is being conducted at your main residence. The only activity carried on at your main residence is storage of the some trading stock. This is not enough for your main residence to be considered a place of business. 

Your circumstances are not sufficiently different from each of the above cases to treat your main residence as a place of business as there is no evidence of any essential business activity being carried on in the property, either from the point of view of the partnership or the individual partner. It is only the associated activity (the storage), as in the above cases that is carried on in the home. So, the essential character of the rental expense is that of providing a place of residence and the place of residence is not seen as a place of business. Therefore, the rental expense is not a deductible expense under section 8-1 of the ITAA 1997.

However as the room is used in connection with income producing activities of the partnership the running expenses that relate to the use of the room within the home are an allowable deduction. Such running expenses may include electricity charges for heating/cooling, lighting, cleaning costs, depreciation and the cost of repairs on items of shelving in the room.

A deduction for running costs is only allowed where additional running costs are incurred because of your income producing activities. That is, the amount you are entitled to claim is the difference between what was actually paid for electricity and cleaning and what would have been paid had you not used the room for income producing purposes.

Please ensure you keep the relevant records to calculate the income producing portion of your running expenses. A diary covering a four week period showing the pattern of usage of the room used to store the stock should be kept to support any deduction claimed. Further details in relation to calculating any allowable deduction can be found on the Australian Taxation Office website www.ato.gov.au and TR 93/30.

Decline in value

Division 40 of the ITAA 1997 deals with deductions for the cost of depreciating assets. Section 40-25 of the ITAA 1997 allows a taxpayer to deduct an amount equal to the decline in value of a depreciating asset which is held for any time during an income year and used for a taxable purpose. A taxable purpose includes the purpose of producing assessable income (subsection 40-25(7) of the ITAA 1997).

Where the equipment has been purchased part way through the income year you must pro-rata the deduction based on the number of days that you hold the depreciating asset.

If equipment is used partly for work related purposes and partly for other purposes, then the depreciation should be apportioned based on an estimate of the percentage of work-related use. Generally, the amount of your deduction depends on the effective life of the equipment.

The effective life of the asset is used in determining the amount of the deduction allowed for the decline in the value of the asset. You calculate this deduction using either the prime cost method (where the deduction is the same every year until it is written off or disposed of) or the diminishing value method (where the deduction is larger in the earlier years but reduces over the life of the asset). We have enclosed the Tax Office's publication Guide to Depreciating Assets for 2010 (NAT 1996), for the prime cost method and the diminishing value method (refer to pages 6 to 7).

In your case, you have purchased materials and built a number of free standing shelves which you use to store some trading stock in relation to earning your assessable income from the partnership. As the individual partner you are considered the owner of the free standing shelves and use the free standing book shelves for a taxable purpose. Therefore, a deduction should be claimed in your individual tax return and not the partnership return.

Accordingly, you are entitled to claim a deduction for the decline in value of the shelves under section 40-25 of the ITAA 1997.