Edited version of private ruling

Authorisation Number: 1011674032279

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Ruling

Subject: Assessable income

Questions and answers:

Is the proposed payment you will receive assessable income?

Yes

Are you entitled to a deduction for expenses directly related to the receipt of those payments?

Yes

This ruling applies for the following periods:

Year ended 30 June 2009

Year ended 30 June 2010

Year ended 30 June 2011

Year ended 30 June 2012

Year ended 30 June 2013

The scheme commenced on:

1 July 2008

Relevant facts and circumstances

You work in the health industry.

You work from home.

You receive fortnightly payments from your current employer.

You are not reimbursed for additional expenses you incur by your current employer.

Your current employer is proposing to make non-employer payments under a new arrangement for you to provide the same service as you do now.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Section 85-15

Income Tax Assessment Act 1997 Section 87-18

Income Tax Assessment Act 1997 Section 87-20

Income Tax Assessment Act 1997 Section 87-25

Income Tax Assessment Act 1997 Section 87-30

Reasons for decision

Is the payment for providing care assessable income?

In determining if an amount is income according to ordinary concepts, consideration must be given to whether the amount is the product of any income producing activity.

Such an activity could include employment, carrying on a business or rendering a service.

Income generally includes receipts that:

· are earned;

· are expected;

· are relied upon; and

· have an element of periodicity, recurrence or regularity.

Taxation Determination TD 2004/75 considers the relevant factors that are taken into consideration in determining whether a payment is ordinary income including whether the payment is for services rendered, such as from personal services, and the character of the payment in the hands of the recipient.

Income Tax Ruling IT 2639 describes income from personal services as 'income that an individual earns predominantly as a direct reward for his or her personal efforts, for example, the provision of services, exercise of skills or the application of labour'.

Predominantly this definition allows for the situation where personal services involve the use of some equipment, for example the drawing board of an architect.

An obvious example of ordinary income derived from the rendering of personal services is wages and salary derived by employees (paragraph 36 of Taxation Ruling IT 2330).

Identifying whether a relationship is that of employer/employee requires a close examination of the facts in each case. In Stevens v Brodribb Sawmilling Company Pty Ltd (1986) 160 CLR 16, the High Court, in considering the common law meaning of the term 'employee' found that there is no single test to determine the nature of the relationship. Rather, it is the totality of the relationship between the parties which must be considered to determine whether there is a contract for services (employer/ employee relationship).

Mason J, in identifying various factors as indicators of the true nature of the relationship, stated at page 24:

The existence of control, whilst significant, is not the sole criterion by which to gauge whether a relationship is one of employment... Other relevant matters include, but are not limited to, the mode of remuneration, the provision and maintenance of equipment, the obligation to work, the hours of work and provision for holidays, the deduction of income tax and the delegation of work by the putative employee.

Accordingly the payment that you propose to receive under the new Agreement with your employer is ordinary income under section 6-5 of the ITAA 1997 due to the provision of a service you will be carrying out as is assessable income.

Are expenses directly incurred in caring for the supported person deductible?

An expense which is incurred exclusively for the purpose of earning your income is fully deductible (section 8-1 of ITAA 1997).

However, if the expense contains a private proportion, the expense is not fully deductible and must be apportioned.

The cost of providing food to your client is an allowable deduction under section 8-1 of the ITAA 1997 as it is incurred in producing your income.

The cost of travel expenses in relation to your client such as fares and entry fees are fully deductible (section 8-1 of the ITAA 1997).

TR 93/30 Income Tax: deductions for home office expenses (TR 93/30) looks at what deductions are allowable when an area of the home is used for work purposes.

Paragraph 6 of TR 93/30 divides the deductible expenses in respect of a home office into two broad categories:

Occupancy Expenses

These expenses relate to ownership or use of a home which are not affected by the taxpayer's income earning activities. They include rent, mortgage interest, repairs, municipal and water rates and house insurance premiums.

However, section 85-15 of the ITAA 1997 states that you cannot deduct an amount of rent, mortgage interest, rates or land tax for your residence to the extent that the amount relates to the gaining or producing of your personal services income. The income derived under your contract with your employer is personal services income as it is a reward for your personal efforts or skills.

Section 85-30 of the ITAA 1997 states that, among other things, section 85-15 will not apply to any payment to the extent that it relates to income from you conducting a personal services business. To be conducting a personal services business you need to pass one of the following tests, or hold a Personal Services Business Determination from the Commissioner stating that you are conducting a personal services business:

· the Results Test (section 87-18 of ITAA 1997); or

· the Unrelated Clients Test (section 87-20 of ITAA 1997; or

· the Employment Test (section 87-25 of ITAA 1997; or

· the Business Premises Test (section 87-30 of ITAA 1997.

The Commissioner may also issue a Personal Services Business Determination if there are unusual circumstances which prevented you from meeting one of the Personal Services Business Tests in an income year.

Given your circumstances, you would not meet any of the above tests and there would not appear to be any unusual circumstances that prevented you from meeting one of those tests.

Running Expenses

These expenses relate to the use of facilities within the home. They include electricity charges for heating/cooling, lighting, cleaning costs, depreciation, leasing charges and the cost of repairs on items of furniture and furnishings in the office.

As a general rule, expenses associated with a taxpayer's home are of a private or domestic nature and do not qualify as deductions for taxation purposes. 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" (see paragraph 2 of TR 93/30).

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 (see paragraph 4 of TR 93/30).

In your case, you work from home caring for a person who lives with you. The only area specifically set aside for the client is their own bedroom. The rest of your residence is shared with the client, except for your own bedroom.

Most of your home does not have the character of a place of business as it is simply used in connection with your income earning activities. The shared areas retain their private nature. Only the areas of your home which are set aside exclusively for the client (that is the client's bedroom) would have the character of a place of business.

Therefore, with respect to the area of your home which has the character of a place of business (that is, the client's bedroom), a proportion of the expenses from both categories (occupancy and running expenses) may be claimed as a deduction. This is determined by using the percentage of floor area method.

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, only expenses in the latter categories (that is, running expenses) are allowable. The amounts allowable as deductions are the additional expenses incurred as a result of income producing activities (see paragraph 7 of TR93/30).

Therefore, for areas in your home which are used by both you and the client, only a reasonable proportion of the running expenses may be claimed as a deduction.