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Ruling

Subject: Work related expense - purchase of property for research purposes

Question 1

Are interest charges incurred in respect of the purchase of a property that will be used for research purposes an allowable deduction?

Answer

No

Question 2

Are related costs of owning the land, such as repairs, maintenance of equipment and purchase of miscellaneous items deductible expenditure?

Answer

No

This ruling applies for the following periods:

Year ended 30 June 2011

Year ended 30 June 2012

Year ended 30 June 2013

The scheme commenced on:

1 July 2010

Relevant facts and circumstances

You are employed as a research scientist.

In the past you have undertaken your research by conducting experiments on various properties under a range of different natural and controlled environments.

You are planning to purchase a property to enable you to conduct various scientific experiments as part of your thesis, which is a necessity for your continuing employment, advancement of your career and income earning capacity.

The property is close to the properties on which you are currently conducting experiments and the purchase will enable you to have better and timelier access to those properties when conducting more intensive sampling as required.

The property includes a homestead that you will use as your principal residence. You propose that a 2 hectare area surrounding the homestead be excluded from any deduction allowable as you consider it to be applicable to private use.

You have set out a list of your employment duties and have provided details of the scientific papers you have had published.

The purchase of the land is relevant because your employment is based upon the carrying out of scientific experiments which are conducted on commercial properties. Sometimes these properties are owned by your employer but more usually they are conducted on the properties of private landholders. By purchasing land yourself you believe you will overcome a number of disadvantages present in the existing system.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Reasons for decision

Question 1

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 provides the Commissioner's views on the deductions allowable for home office expenses. Whilst your question concerns an area of your property that is distinct from the residence, it is considered that the views expressed in this ruling have equal application to your circumstances.

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". In such cases some of the expenses incurred in respect of the home such as rent, interest, repairs, house and contents insurance, rates and property taxes may be partly deductible.

Another exception to this general rule is where part of the home is used in connection with the taxpayer's income earning activities but does not constitute a place of business. In this case, a more limited range of deductions may be available.

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 (e.g., a doctor's surgery). 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).

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 which are not affected by the taxpayer's income earning activities (i.e., occupancy expenses). These include rent, mortgage interest, municipal and water rates, land taxes and house insurance premiums; and

· expenses relating to the use of facilities within the home (i.e., running expenses). These 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.

If an area of the home has the character of 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, only expenses in the latter category (the running expenses) are allowable. The amounts allowable as deductions in this situation are the additional expenses incurred as a result of the income producing activities.

The reason this distinction is important is that if an area of the residence has the character of a place of business then expenses associated with that part of the residence can be said to take on a business or businesslike character and are therefore allowable deductions (see Swinford v FC of T (1984) 15 ATR 1154; 84 ATC 4803). In effect the area so used loses its domestic character.

In your case, your employer provides you with the facilities required to perform your work and the decision to carry out experiments and research activities on your own property, rather than on land owned by private landholders or your employer, is therefore considered to be one of personal choice.

As you only intend to carry on your employer's business on the property, the property is not considered to be your place of business and the property will retain its private or domestic character. Support for these views can be found in Handley v FC of T (1981) 11 ATR 644 and Forsyth v FC of T (1981) 11 ATR 657; 81 ATC 4157.

Accordingly, no deduction will be allowed for interest expenses incurred in purchasing the property. The interest expense incurred will be regarded as private expenditure.

Question 2

For the reasons stated in question 1 your property is not considered to be a place of business and the related costs of owning the land are regarded as private expenditure. Accordingly, no deduction will be allowed under section 8-1 of the ITAA 1997 for this expense.

The examples you have given for related costs of owning the land, such as repairs, maintenance of equipment and purchase of miscellaneous items of equipment are not actually costs of owning the land. Costs of owning the land are usually described as interest, rates, land taxes or similar charges.

Costs such as repairs and maintenance of equipment may be allowable if they are in the nature of running expenses, as described above, that are incurred in carrying out your employment duties. The cost of purchasing equipment, however, would normally be regarded as a capital expense and not deductible under section 8-1 of the ITAA 1997.