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Ruling

Subject: Home office occupancy expenses

Question 1

Can you claim a deduction for occupancy expenses under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) in respect of an area of your home which is set aside for exclusive business use?

Answer

Yes

Question 2

Can you claim occupancy expenses in respect of those areas of your home used only partly for business purposes in proportion to the business usage of those areas?

Answer

No. Unless the area is used almost exclusively for business, occupancy expenses would not be deductible.

This ruling applies for the following periods:

1 July 2010 to 30 June 2011

The scheme commences on:

1 July 2010

Relevant facts and circumstances

You operate an activity out of your residence. You have no other business premises.

You currently provide services to a business. You state that you are not an employee of the business but a sole trader contracting to the business.

You use part of your house as an office area for the business. The area is designated exclusively for business and is not used for any other purpose.

There is no signage on your residence to indicate a business activity is conducted at the property. Clients of the business contact you through the business telephone number. The address of your residence is not noted on the business stationery or business cards of the firm to which you contract. Clients of the other business do not visit your residence.

Relevant legislative provisions

Income Tax Assessment Act 1997 8-1.

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

The costs associated with a taxpayer's home are normally of a private or domestic nature. The exception to that general position is where the home is used in income earning activities.

There are two types of expenses associated with the home which can be claimed as deductions against assessable income: occupancy expenses and running expenses. When you operate a place of business from home you can claim deductions for both occupancy expenses and running expenses. Taxation Ruling TR 93/30 provides guidance on the standard which must be met for home-based activities to constitute a home place of business.

Generally, occupancy expenses are deductible in accordance with that proportion of the floor area of the premises which is set aside for exclusive, or almost exclusive, business use. Other methods of calculation can be used but in such cases it is necessary for the taxpayer to be able to justify why that method was more appropriate and how they arrived at their figures.

The use of the term 'almost exclusive' in TR 93/30 contemplates something less than exclusive business use of an area still qualifying as a business area for the purposes of claiming occupancy expenses. In practice, for those areas of the home which have mixed business and private use, where the private use is more than marginal it would be difficult to satisfy the requirements for claiming anything more than running expenses.

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.

Where the home is a place of business 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 directly 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. It 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. The absence of an alternative place for conducting income producing activities has also influenced courts or tribunals to accept that a part of a taxpayer's residence is a place of business.

In cases decided favourably, the taxpayer was able to show that, as a matter of fact, there was no alternative place of business, it was necessary to work from home, and that the area in question was used exclusively or almost exclusively for income producing purposes.

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.

If the area used is a place of business, occupancy expenses 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.

As outlined in TR 93/30, deductions for occupancy expenses such as rent are normally calculated on a floor area basis. That is an acceptable method of apportionment of expenses under section 8-1.

A taxpayer may choose to adopt another method of apportionment. However, using an alternative method would be conditional on being able to demonstrate that the method used is one which apportions the costs on a fair and reasonable basis. It is necessary for the taxpayer to be able to justify why that method was more appropriate and how they arrived at their figures.

In some cases where a taxpayer uses their home for income-producing purposes, there will be work areas which have a mix of business and private use. TR 93/30 clearly envisages such a situation in that it discusses apportionment between uses on a time basis and also it refers to using an area 'almost exclusively' thereby contemplating something less than exclusive business use.

Time apportionment is relatively straightforward where there are discrete periods where an area is used exclusively for business and other periods where it is not used for that purpose at all. An example of such usage would be in a situation where a business is seasonal in nature.

That situation can be contrasted with concurrent mixed use. 'Almost exclusive,' whilst being something less than absolute exclusivity, contemplates something very near exclusive business use. In practice, therefore, for those areas of the home which have mixed business and private use, where the private use is more than marginal, it would be difficult to satisfy the requirements for claiming anything more than running expenses.

That would be particularly the case for facilities whose use is fundamentally private in nature and part of the normal enjoyment of a private home. The use of such facilities either directly or indirectly in connection with business would not transform them from areas which are fundamentally private and domestic in nature.

In your case you have an exclusive area set aside as a place of business. The occupancy expenses in respect of this area are allowable as a deduction under section 8-1. However, you would not be entitled to claim occupancy expenses in respect of any areas not used exclusively or almost exclusively by you as a place of business.