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Ruling

Subject: Family Day Care Provider- Deductions

Question 1

Are you entitled to claim a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for the total cost of erecting two fences as part of the required changes set down by your local council prior to you receiving your licence to operate as a family day carer?

Answer: No

Question 2

Are you entitled to claim a deduction for the cost of erecting the fences under Division 43 of the ITAA 1997?

Answer: No

This ruling applies for the following periods:

Year ended 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts and circumstances

You commenced the process to become a licensed Family Day Carer in November 20XX.

As part of this process council officers conducted a safety check of your home. It was found that your home was not suitable to conduct a Family Day Care business unless you made the following changes:

· Construction of fences from the side of the garage to the back fence in order to prevent children from entering the front yard unsupervised.

· Construction of a fence from the side of the house to the back fence to safely enclose children in the back yard and to prevent children accessing the area containing the hot water system and cactus plants. Also to prevent the children from disappearing out of sight of the carer.

You advise that your home already had sound and serviceable fences including a front fence, side fence and back fence; the block is triangular in shape. However, you erected the two fences yourself.

It could be deemed that the outside yard has three outside areas that were not divided by fences; the front yard, the back yard and the side area.

The Council officers decided that part of the back yard needed to be enclosed to contain small children so that they would be in view of the carer at all times.

The two small fences were installed for the safety and well being of prospective clients' children and to keep them in an enclosed area of your home.

A second Annual Home Safety Check was conducted after the fences were erected. Your licence was granted after the completion of the fences and this second check which was conducted in March 2011.

You lodged an application for a Private Binding Ruling in August 20XX. You ask if you can claim the cost of the fences as a deduction in your income tax return for the 20XX-XX financial year.

In your application you state that:

o You would not have been granted your licence to run a Family Day Care Business if you had refused or declined to build the fences.

o Your home already had functional and sound fences.

o The decision to build the new fences was a business decision to ensure you received your licence and thereby enable you to earn an income.

o Under no other circumstances would consideration have been given to erecting the fences.

o The fenced area is only used as a walk way to access other areas of the yard. When you are outside with the children the gates are opened to allow easy access to all areas of the yard. The gates are a nuisance to you at all other times especially if you are entertaining.

o No other small children reside in the home and you don't have small children visiting you.

o You don't have any grandchildren who would use the fenced area

o You don't have any animals that could be enclosed in the area.

o The fences were erected solely so that you could earn income and generate revenue not to increase the value of the family home.

o You do not use the fenced in area as a fenced in area for any form of personal enjoyment. As it is a part of your yard you use it from time to time simply because it exists and not because it is now an enclosed area.

It is your belief that you might be able to claim a deduction for capital works for expenditure incurred on an area that you own and use for producing assessable income.

In your letter you ask us to take note of the following:

o You do not use an accountant

o The local council was the guiding authority when you set up your business.

o The council told you that the fences were tax deductible.

o You are in full time business from Monday to Friday.

o You rely on the council to refer clients to you and you are not permitted to advertise or take on clients independent of the council.

o You are not employed in any other capacity.

In support of your application you have supplied the following information:

o Certificate of Registration of Business Name.

o Australian Business Number

o Certificate of Licence

o Front page of your Licence Agreement showing that you were licensed in March 20XX.

o Your records which show expenses and income showing a projected loss at the time of preparing your income tax return.

o The local city council Family Day Care Annual Safety Check. Page 8 details the required changes needed to pass safety check.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1 and

Income Tax Assessment Act 1997 Division 43.

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 or are necessarily incurred in carrying on a business for the purposes of gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature.

Taxation Determination TD 93/21 Income tax: in what circumstances is a deduction allowable for the cost of fences and gates constructed on a carer's property, under the direction of Family Day Care states at paragraph 1 that expenditure of this kind is capital in nature and not an allowable deduction under the former subsection 51(1) of the Income Tax Assessment Act 1936 (ITAA 1936). Therefore the cost of fences and gates would not be deductible under section 8-1 of the ITAA 1997.

Your case

You are a licensed family day care provider. As part of your registration process your home had to pass a safety check. You were advised to construct two extra fences to protect the children in your care. You did not operate your Day Care until you had passed the safety check and became licensed.

As per the guidelines in TD 93/21 the expenditure that you incurred on the fences is considered to be capital and therefore is not deductible under section 8-1 of the ITAA 1997.

Capital works

Section 43-10 of the ITAA 1997 provides a deduction for certain expenditure incurred in respect of the construction of capital works such as buildings or structural improvements, including any extensions, alterations, or improvements to buildings or structural improvements. The deduction is either 2.5% or 4% of the construction expenditure depending on when construction started and the purpose for which the capital works are used.

Section 43-170 of the ITAA 1997 states that a part of capital works is not taken to be used for the purpose of producing assessable income, if that part is for use mainly for or in association with residential accommodation by you or an associate.

TD 93/21 states that fences and gates on a carer's property are usually part of a carer's home and the cost of the fences and gates is not deductible. However, if the fencing relates to an area which is separate and distinct from the home and set aside solely for the care of children under a Family Day Care program, then a carer would be entitled to a capital works deduction. Paragraph 7 of TD 93/21 states that it would only be in rare circumstances that fences and gates at a carer's residence would meet these requirements.

The same outcome is set down in ATO Interpretive Decision 2003/706 where the following is stated:

'...a taxpayer is only entitled to a deduction for improvements at their residential home if the improvements relate to an area which is separate and distinct from the home and set aside for carrying on their business.'

Your case

In your ruling application you state that the area is only used as a walk way to access other areas of the yard and when you and the children are outside you open the gates to give easy access to all areas of the yard.

Whilst you state that you do not use the area as a fenced in area for any form of personal enjoyment, you acknowledge that it is an area of your yard that you use from time to time simply because it exists.

In view of this, the improvements (the fences) do not relate to an area which is separate and distinct from the home and set aside for the care of the children under a Family Day Care program.

Therefore any capital works expenditure on the fences is excluded from deduction under Division 43 of the ITAA 1997.