Edited version of private ruling

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Ruling

Subject: Home Day Care

Are you entitled to a deduction for occupancy expenses in respect of your home?

No.

Relevant facts

You commenced a Family Day Care business.

A requirement of the Family Day Care was that you made your home safe.

You look after children in your home five days per week.

The child care children have access to the all areas of the house except for the main bedroom.

You are allowed to have up to four Day Care children.

The Day Care children sleep in the bedrooms during the day.

When other members of your family are present, including your own children, they use the same areas as the Day Care children.

Expenses you incur in respect of the home include interest, rates, water and insurance.

You estimate that the floor space that the Day Care children have access to is 80%.

You wish to claim 80% X 5/7 days per week for 50 weeks per year. This totals 54.94%.

You do not have signage to identify your house as a business.

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.

The costs associated with a taxpayer's home are normally of a private or domestic nature and do not qualify as deductions for taxation purposes (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 part of the home 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 home such as rent may be partly deductible.

Taxation Ruling TR 93/30 discusses the deductibility of home office expenses. The principles can be applied to other instances in which income producing activities are undertaken in a taxpayer's principal residence. TR 93/30 also 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).

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.

IT 2673 also discusses situations in which income producing activities are undertaken in a sole or principal residence. Paragraph 12 states that the test of a 'place of business' would not be satisfied in the common Family Day Care giver situation where, within limits, children who are being cared for are treated more or less as members of the care giver's family.

If there is an area set aside exclusively for the business activity then one can generally claim rent expenses provided the area set aside has the character of a place of business. If one does not have an area set aside exclusively for business then one can not claim rent expenses.

Where the area used is a place of business, occupancy expenses such as rent or mortgage interest which are associated with that part of the home take on a business or businesslike character and are allowable deductions. The area used loses its domestic character.

In a Family Day Care situation, the most common problem for a carer is to determine the amount, if any, of the cost which is allowed as a deductible expense, especially where costs relate to both private and Family Day Care activities. No deduction is available for purely private expenditure.

An expense is fully deductible when it is incurred exclusively for your business activity. That is where ones family do not receive any benefit from the expense.

It is acknowledged that you provide supervision and care in your own home for other people's children and use much of your home for this purpose. However there is no area of your home that is set aside exclusively for the care of these children.

Although you operate your business from home, the occupancy expenses in respect of the home have not increased as a result of your home based business. You would have your expenses regardless of whether you were carrying on a business.

You have no signage to identify your home as a business. Your home is not regarded as a place of business for taxation purposes. Consequently, you are not entitled to claim a deduction for any of your occupancy expenses in respect of the home.