Edited version of private ruling

Authorisation Number: 1011698047905

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Ruling

Subject: Place of business

Question

Are you entitled to a deduction for a portion of the interest component of your mortgage repayments and electricity expenses in relation to an area of your home used for your business?

Answer: Yes

This ruling applies for the following period

Year ended 30 June 2010

Year ending 30 June 2011

Year ending 30 June 2012

Year ending 30 June 2013

The scheme commenced on

1 July 2010

Relevant facts

The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are:

· a private ruling application

· a property plan for the property

· photographs of the office and shed area of the property.

You operate a business from your main residence.

You commenced trading late in the income year.

You undertake work at your client's premises and also at your main residence.

The shed is not readily adaptable for private purposes as you use the shed to securely store your work tools, machinery and materials for business and to manufacture items and articles for your clients.

You use the shed exclusively for activities relating to your business.

One room in your main residence is used as an office for book keeping, preparing quotes, invoicing customers, storing files and documents, answering customer telephone inquiries, scanning and sending documents and paying bills.

The office contains a desk, office chair, computer and built in cupboards to store files, books and documentation.

The office is used exclusively to carry out activities relating to your business.

Customers visit the office and shed areas.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1.

Reasons for decision

Summary

Your home office and the shed area used to store your materials, tools, and equipment and to undertake the manufacture of items are considered to be a place of business. As such, you are entitled to claim a deduction for your occupancy expenses (including a portion of the interest component of your mortgage repayments) and running expenses (including electricity expenses) incurred in relation to the place of business.

Detailed reasoning

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.

Taxation Ruling TR 93/30 explains that a taxpayer is only entitled to a deduction for a portion of occupancy expenses (for example, rent or interest on a mortgage) at their residential home if part of the home is a place of business. A deduction for additional running expenses such as lighting and heating is also allowable.

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 (for example, a study used by a teacher who takes assignments home to mark), a deduction is only allowable for additional running expenses; no deduction is allowable for occupancy expenses.

In most cases a place of business will be clearly separate from the domestic residence, for example, a workshop for a tradesman or a doctor's consulting rooms. However, the fact that the area is not so obviously unsuitable for ordinary living purposes will not necessarily preclude a deduction for occupancy expenses.

In Swinford v. Commissioner of Taxation [1984] 3 NSWLR 118; (1984) 84 ATC 4803; (1984) 15 ATR 1154; (1984) 80 FLR 1, a self employed script writer converted one bedroom of a rented flat into an office which was used solely for writing activities. No facilities were provided by the radio and television studios for which the writer prepared scripts. The room was equipped with a desk, phone, typewriter and files. Clothes were also stored in the room. It was accepted that the taxpayer rented that particular flat because it had a second bedroom which could be used for writing activities.

The NSW Supreme Court held that the part of the rent referable to the home office was deductible in that the expense was incurred for the purpose of earning assessable income and was not of a capital, private or domestic nature.

TR 93/30 states that whether a part of a home has the character of a place of business is a question of fact which depends on the particular circumstances of each case.

The following factors, none of which is necessarily conclusive on its own, may indicate whether or not an area has the character of a place of business:

· it is clearly identifiable as a place of business;

· it is not readily suitable or adaptable for use for private or domestic purposes in association with the home generally;

· it is used exclusively or almost exclusively for carrying on a business; or

· it is used regularly for visits of clients or customers.

It is the Commissioner's view that a place of business exists 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 is necessary to work from home; and

· the area is used exclusively or almost exclusively for income-producing purposes.

In your case, you operate a business and use your shed to store tools and machinery, and construct and assemble items for clients. You also use a room in the residence as an office where you undertake a number of activities in relation to the business such as bookkeeping, quotes, invoicing and answering customer queries over the telephone. Both the shed and the office are set up, and used, exclusively for the business. The shed and office are also visited by clients.

In considering the nature of the business activity you are engaged in and the circumstances surrounding the use of the shed and office and given there is no alternate place for you to undertake your business activities, the Commissioner accepts both the shed and the office are a place of business.

You are entitled to claim a deduction for occupancy expenses you have incurred based on the floor area of the shed and the office. However, as the shed and the home office area have been used as a place of business for part of the 2009-10 income year you should also apportion the occupancy expenses on a time basis. The time apportionment under this method should reflect the period of the year in which the room is used for income producing purposes.

The occupancy expenses you can deduct includes a portion of the interest component of your mortgage repayments. Mortgage repayments ordinarily consist of an interest component and a capital repayment component. No part of this latter component is deductible as it is capital in nature.

You are also entitled to claim a deduction for running expenses, such as electricity, you have incurred in relation to your place of business.

For your information on how to calculate your deductions for occupancy and running expenses, we have enclosed a copy of TR 93/30.