Edited version of private ruling

Authorisation Number: 1011853747768

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Ruling

Subject: Home office expenses

Question

Can you claim a deduction under section 8-1 of the Income Tax assessment Act 1997 (ITAA 1997) in respect of the cost of solar panels which you have installed on your home where you operate a home office which is not a home place of business?

Answer

No.

This ruling applies for the following period:

1 July 2010 to 30 June 2011.

The scheme commences on:

1 July 2010.

Relevant facts and circumstances

You claim home office expenses and have in the past claimed deductions in respect of your energy costs. You installed solar panels on your home, which has had the effect of reducing your power bills to almost nil. The solar system is considered a small system.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1.

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA of the ITAA 1936 applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA of the ITAA 1936 to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA of the ITAA 1936 applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA of the ITAA 1936 may apply.

For more information on Part IVA of the ITAA 1936, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax.

Reasons for decision

Unless otherwise stated, all legislative references in the following Reasons for Decision are to the Income Tax Assessment Act 1997 (ITAA 1997).

Summary

When you operate a place of business from home you can claim deductions for both occupancy expenses and running expenses. However, if you merely maintain a home office to perform some work duties but have a normal place of work elsewhere, you can only claim deductions for running expenses.

Electricity costs are running expenses and taxpayers operating a home office can claim for the appropriate proportion of the energy usage. However, depreciation of solar panels constitutes occupancy expenses and deductions would therefore only be available to taxpayers operating a place of business from home.

Detailed reasoning

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. Exceptions to that general rule apply where a taxpayer carries on part or all of their business or employment activities at home. In such cases, a taxpayer may be entitled under section 8-1 to a deduction for part of the outgoings associated with the home.

One such exception is where part of the home is used for income producing activities and has the character of a place of business. Another exception is where part of the home is used in connection with the taxpayer's income earning activities but not to the extent that it constitutes a place of business. In the latter case, a more limited range of deductions may be available.

The extent of allowable deductions depends on which category a taxpayer's activities fall into; whether the home can be regarded as a place of business or whether the taxpayer simply finds it convenient to do part of their work at home. The deductible expenses in respect of a home office can be divided into two broad categories:

Expenses relating to ownership or use of a home (i.e. occupancy expenses). They include rent, mortgage interest, municipal and water rates, land taxes and house insurance premiums.

Expenses relating to the use of facilities within the home (i.e., running expenses). They include electricity charges for heating/cooling, lighting, cleaning costs, depreciation on office fittings and the cost of repairs on items such as furnishings in the office.

In short, occupancy expenses pertain to the building structure and can only be claimed where the premises form an integral part of the income-earning activity. Running costs represent additional expenses which have only been incurred as a consequence of the work-related activities performed at the home.

A wider range of deductions can be claimed where the home is a place of business. In that case, some part of the expenses from both categories may be claimed as a deduction.

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 - for example, where an employee just brings work home for personal convenience - only expenses in the latter category (the running expenses) are allowable. In that case, the amounts allowable as deductions are the additional expenses which result from income producing activities.

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. That 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. Examples include:

· a doctor or dentist who has a surgery, consulting or waiting rooms at home

· a tradesperson who has a workshop at home

· someone for whom part of their home is business premises e.g. a butcher who lives above his shop

Another example is where part of the home is used as a taxpayer's sole base of operations for income producing activities e.g. where no other work location is provided to an employee by an employer.

Taxation ruling TR 93/30 states that in determining whether the area set aside qualifies as a place of business, the Commissioner will consider the following factors):

· whether the area is clearly identifiable as a place of business

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

· whether the area is used exclusively or almost exclusively for business purposes

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

In addition to the above factors, the Commissioner's decision will depend on whether, on a balanced consideration of the essential nature of the area, the nature of the taxpayer's business and any other relevant factors, the area constitutes a place of business in the ordinary and commonsense meaning of the term.

In your case, you are a wage earner who performs some duties at home but those activities do not constitute the conduct of a business. Consequently, you would be able to claim deductions for relevant running expenses but not occupancy expenses. Running expenses would include electricity expenses for such purposes as lighting and heating the home office area and running any office equipment, which you indicate you have been claiming. However, depreciation on items referable to the home but which are not specific home office equipment such as solar panels would be occupancy expenses and therefore not deductible as home office expenses.