Edited version of private ruling

Authorisation Number: 1011774693852

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Ruling

Subject: Self-education expenses

Questions and answers:

1. Are you entitled to a deduction for the accommodation and meal expenses incurred while you were undertaking an overseas work program in Country X?

No.

2. Are you entitled to a deduction for living expenses such as electricity, water rates and council tax incurred as a tenant of a rental property while on an overseas work program?

No.

3. Are you entitled to a deduction for rental payments, council rates and water rates for an area of your home used as a home office?

No.

This ruling applies for the following period:

Year ended 30 June 2010

The scheme commenced on:

1 July 2009

Relevant facts:

You are employed on a fulltime basis in Australia.

In the financial year ended 30 June 2010, you went to Country X as part of a special program to carry out your work.

Your Australian employer continued to employ you and pay you during this trip. You were considered a visitor at your workplace in Country X.

You were paid an allowance to cover airfares and living expenses and you incurred expenses in addition to what this allowance covered.

The purpose of your trip was to undertake further study in your field, to meet others in your field, to collaborate on research with them and to present the results you have found.

Your family accompanied you on your work trip.

You and your family rented a short-lease fully furnished apartment for the duration of your stay.

During your time living in Country X, you made short trips to other places as part of your work. Your family did not accompany you on these short visits but instead remained in your accommodation in Country X.

Your eldest child attended school in Country X for one term.

You and your family spent just X months in Country X.

In Australia, you are not required to attend your workplace every day and can work from home.

You currently live in a house with a dedicated home office in order for you to work at home.

You employer provides you with an office on their premises.

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.

Taxation Ruling TR 98/9 Income Tax: deductibility of self-education expenses discusses the circumstances under which self-education expenses are allowable as a deduction. A deduction is allowable for self-education expenses if a taxpayer's income-earning activities are based on the exercise of a skill or some specific knowledge, and the subject of self-education enables the taxpayer to maintain or improve that skill or knowledge (paragraph 13).

If the study of a subject of self-education objectively leads to, or is likely to lead to an increase in a taxpayer's income from their current income earning activities in the future, a deduction is allowable (paragraph 14).

In your case, in your position, you possess specific skills and knowledge and they are crucial to your income-earning activities. Your overseas work program is a recognised self-education activity and did enable you to improve or maintain your skills and knowledge by collaborating with Country X colleagues in your field and undertaking further research.

Therefore, the self-education expenses you incurred while on your overseas work program may be an allowable deduction under 8-1 of the ITAA 1997.

Accommodation and meal expenses

Expenditure on accommodation and meals ordinarily has the character of a private or domestic expense. However, the occasion of the outgoing may operate to give the expenditure the essential character of an income-producing expense. Paragraph 89 of TR 98/9 elaborates:

Where a taxpayer is away from home overnight in connection with a self-education activity, accommodation and meals expenses incurred are deductible under section 8-1. (Examples include an overseas study tour or sabbatical, a work-related conference or seminar or attending an educational institution.) They are part of the necessary cost of participating in the tour or attending the conference, the seminar or the educational institution. We do not consider such expenditure to be of a private nature because its occasion is the taxpayer's travel away from home on income-producing activities.

However, paragraph 24 (c) of TR 98/9 explains that expenditure on meals and accommodation will not be allowable as a self-education deduction where a taxpayer has travelled to another location and has established a new home. Paragraph 93 of TR 98/9 lists the key factors to be taken into account in determining whether a new home has been established. These factors include:

· the total duration of the travel

· whether the taxpayer stays in one place or moves frequently from place to place

· the nature of the accommodation, e.g., hotel, motel, long term accommodation

· whether the taxpayer is accompanied by his or her family

· whether the taxpayer is maintaining a home at the previous location while away, and

· the frequency and duration of return trips to the previous location.

The question of whether a new home has been established depends on all the facts. There is no one test to satisfy all the circumstances.

TR 98/9 provides a number of examples designed to illustrate factors and circumstances that are relevant in determining whether a taxpayer has established a new home in a new location. Most applicable to your case is the example given in paragraph 106 which states:

A similar factual situation occurred in Case S80 85 ATC 589; 28 CTBR (NS) Case 88. While the case concerned the question of the appropriate apportionment of a rental expense, preliminary comments made by T J McCarthy (Member) support our view. He did not consider that any part of expenditure on accommodation was allowable as a deduction under section 8-1. He stated (85 ATC at 595; 28 CTBR (NS) at 690):

'Between ... the taxpayer was not travelling away from his home on his work. The apartment in Bonn was, and was intended to be, the family residence for five months. The older children went to school in Bonn and family life was centred in Bonn. Whilst in some cases questions of degree may be involved, I do not think there is any doubt in the present circumstances. The essential character of the rental expenditure is of a private or domestic nature.'

In your case:

· you and your family relocated to Country X for X five months

· you and your family stayed in the same rented apartment for the duration

· your family remained in that accommodation while you took short trips to attend conferences and meetings elsewhere

· your eldest child attended school while you were living in Country X

· you were maintaining a home in Australia

The fact that you were accompanied by your family, the long term nature of your accommodation during your stay, your child attending school and your family remaining in the apartment when you attended conferences elsewhere leads us to the conclusion that you did establish a new home while in Country X.

Therefore, in your case, the expenses you incurred for accommodation and meals while you were participating in your overseas work program are not an allowable self-education deduction.

Electricity, water rates and council taxes

It has been determined that you cannot claim a deduction for accommodation and meal expenses because you established a new home during your time in Country X. These expenses are seen to be private or domestic in nature and not an allowable self-education deduction. The same conclusion can be reached in relation to your living expenses such as electricity, water rates and council taxes. They are regarded as private or domestic expenses and therefore do not qualify as allowable deductions under section 8-1 of the ITAA 1997.

Therefore, in your case, you will not be entitled to claim a deduction for the expenses you incurred in relation to electricity, water rates or council tax while on your overseas work program.

Home office in your house in Australia

The costs associated with a taxpayer's home are normally of a private and domestic nature (Federal Commissioner of Taxation v. Faichney (1972) CLR 38; 72 ATC 4245; (1972) 3 ATR 435) and do not qualify as allowable deductions because they do not satisfy the requirements of section 8-1 of the ITAA 1997.

However, in circumstances where a taxpayer is using part of a home for work purposes, a deduction for a proportion of the costs associated with the home may be allowable.

Taxation Ruling TR 93/30 Income Tax: deductions for home office expenses provides the Commissioner's view on the deductibility of home office expenses and specifies that:

· Costs associated with a taxpayer's home that can be linked with work conducted from the home are categorised as either occupancy or running expenses.

· Where the part of the home being used for income earning activities has the character of a place of business, a proportion of both occupancy and running expenses will be allowable.

· Where part of the home is used in connection with a taxpayer's income earning activities as an employee, but does not constitute a place of business, only a proportion of the running costs will be an allowable deduction.

In the latter case, the area of the home being used is considered to be a private study or an office of convenience, as opposed to a place of business.

Occupancy expenses

Occupancy expenses are those costs related to ownership or use of a home and they are not affected by the taxpayer's income producing activities. These include rent, mortgage interest, repairs to the home, municipal and water rates and house insurance premiums.

If an area of the home being used has the character of a place of business, occupancy expenses associated with that part of the home take on a business or business like character and a proportion of those costs are allowable deductions under section 8-1 of the ITAA 1997 (TR 93/30 paragraph 16).

Running expenses

Running expenses are those costs related to the use of facilities in the home which may be affected as a result of income producing activities. That is, the expenditure actually incurred through the income producing activity is additional to the taxpayer's private expenditure (TR 93/30, paragraph 19). Such costs include heating, cooling and lighting expenses, cleaning costs, depreciation and the cost of repairs of furniture and furnishings in a private study or office of convenience.

To claim any additional running costs relating to a private study or office of convenience, a taxpayer must be able to show that the extra costs incurred relate to facilities provided exclusively for the taxpayer's benefit while working from home.

In most cases the amount of the allowable deduction will be small and apportionment of costs incurred is necessary.

Place of business

Whether an area 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. This is likely to be the case where a part of a residence is set aside exclusively for the carrying on of a business for a self-employed person, or where part of the home is used as a taxpayer's sole base of operations for income producing activities (for example, where no other work location is provided to an employee by an employer).

Paragraph 5 of TR 93/30 sets out the following criteria to be considered in determining whether an area within a taxpayer's home 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.

Paragraph 13 of TR 93/30 states that a place of business will only exist 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 of the home is used exclusively or almost exclusively for income producing purposes.

Private study/office of convenience

Paragraph 14 of TR 93/30 states that 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).

In these circumstances the area of the home being used, and the occupancy expenses related to ownership or use of the home, retain their private or domestic character (Forsyth v FC of T (1981) 11 ATR 657; 81 ATC 4157 (Forsyth's case) and Handley v FC of T (1981) 11 ATR 644; 81 ATC 4165 (Handley's case)).

In Forsyth's case, the Commissioner appealed a decision by the Federal Court to allow a deduction for rent associated with the use of a room within a taxpayer's home for work purposes. The Commissioner's appeal was allowed with the High Court ruling that the expense of the rent was not deductible because the cost was domestic in nature and was not an outgoing incurred in gaining or producing the taxpayer's assessable income. In this case, the facts that the taxpayer had a place of business away from his home where he normally carried out his work and chose to conduct work at home as a matter of convenience were factors in the High Court's decision.

A similar ruling was handed down by the High Court in Handley's case where it considered the deductibility of a proportion of mortgage interest payments, rates and insurance premiums claimed as a deduction in relation to the use of a study within the taxpayer's home. The High Court ruled that the deductions claimed were not allowable because they were of a capital, private or domestic nature and no part of the payments could be considered as outgoings incurred in gaining or producing the taxpayer's assessable income. In handing down its decision in this case, the High Court noted that although the area of the home was being used by the taxpayer predominantly for work purposes, the area remained an integral part of the home.

In your case, you are provided with an office at your place of employment but you choose to do some work at home. The area of your home you are using for this purpose is not clearly identifiable as a place of business and could be readily adapted for private or domestic purposes in association with the remainder of your home. Furthermore, it is not considered an inherent requirement of your employment that you need a place of business, other than that provided by your employer.

Therefore, the area you have set aside in your home to perform your income earning activities is not considered to be a place of business. It is considered to be a private study/office of convenience. As a result, you cannot claim deductions for occupancy expenses such as rent, council rates or water rates. In keeping with the High Court decisions in Forsyth's case and Handley's case, these expenses remain private and domestic in nature and are not deductible under section 8-1 of the ITAA 1997.