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Ruling

Subject: home office expenses

Question

Are you entitled to claim a deduction for rental expenses in relation to your home office?

Answers: No

This ruling applies for the following period

Year ended 30 June 2010

The scheme commenced on

1 July 2009

Relevant facts and circumstances

You were employed as a full time senior consultant for a small firm.

Your employer does not have a fixed office in Australia.

Your employer has an account with a serviced office where they pay a monthly fee to have:

§ a telephone service which forwards calls to your mobile

§ a postal address service which forwards the mail to your home address.

You are able to utilise an office or boardroom at the serviced offices for a short term rental. You are required to book times and dates you require the rooms, with the bill for the rental being added to your employer's account.

You rent a property and have set aside one room as your home office from the period January 2010 to June 2010.

Your employer supplied a desk, chair, filing cabinet, computer and scanner so that you could work from home.

Your employer encouraged you to work from home, however, it was not a requirement in your contract to do so.

You do not see clients in your home. You either meet them at their business premises or book a boardroom at the serviced offices.

The home office is mainly used for work purposes, with only limited private use of the computer.

You have claimed a deduction for rental expenses (using an apportionment of 15% of floor space) in relation to your home office in your income tax return for the 2009-10 financial year.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Reasons for decision

Summary

You are not entitled to claim a deduction for a portion of your rental expenses in relation to your home office as the area does not have the character of a 'place of business', as such, the rental expenses are considered expenses of a private or domestic nature.

Detailed reasoning

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.

Taxation Ruling TR 93/30 discusses home office expenses. It states that deductible expenses in respect of a home office can be divided into two broad categories:

§ Occupancy expenses, i.e., expenses relating to ownership or use of a home which are not affected by the taxpayer's income earning activities. These include rent, mortgage interest, municipal and water rates and house insurance premiums.

§ Running expenses, i.e., expenses relating to the use of facilities within the home. 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.

As a general rule, occupancy expenses are allowable when the part of the home used for income producing activities has the character of a 'place of business'. Some factors which may indicate whether or not an area set aside has the character of a 'place of business' include:

§ 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

§ the area is used regularly for visits of clients or customers

§ the taxpayer's circumstances are such that there is no alternative place for conducting income producing activities, making it necessary to work from home.

The area is clearly identifiable as a place of business

In your case, the home office area is not clearly identifiable as a place of business, it is just a room set aside in your house. The place of business for the company is 'held out' to be the serviced office from which mail and telephone services, and office and boardroom rental, are supplied.

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

The area is readily suitable or adaptable for use for private or domestic purposes as the inclusion of some office furniture into the area does not alter the area to such a degree that it can not also be used for domestic purposes.

The area is used exclusively or almost exclusively for carrying on a business

You were employed full time as a consultant. You spent most of your working day in your home office for the period January 2010 to April 2010. For the period April 2010 to June 2010, when business picked up, you spent approximately 50% of your time in the home office. Over this time, you state the area was used almost exclusively in relation to your income producing activities, with only a small amount of private use.

The area is used regularly for visits of clients or customers

The area is not used for visits from clients or customers. All meetings with clients are undertaken either at the client's premises or in the boardroom of the serviced office.

No alternative place for conducting income producing activities

Your employer has a monthly account with a serviced office that supplies mail and telephone services. In addition, you have the ability to be able to book an office or boardroom as and when you require (which you did on a number of occasions). The extra charge for the use of the office or boardroom is added to your employer's monthly account.

You state that while your employer encouraged you to work from home, it was not a requirement in your contract to do so, however, the home office provided a more suitable environment to work from.

Therefore, we consider that the serviced office is an alternative place to conduct income producing activities. While you did not utilise the offices or boardrooms extensively due to the expense of the short term rental, the fact remains that there was an alternative place that could be used. It is more a matter of choice and convenience on your part, and thrift on the part of your employer, to utilise your home as an office rather than use the available rooms at the serviced office.

The application of the above factors to your situation indicates that the essential character of your home office was that of a private study rather than a 'place of business'. While the home office area was used almost exclusively in relation to your income producing activity, we consider that there are no other supporting factors that indicate that your home office area has the character of a 'place of business'. Accordingly, you are not entitled to claim a deduction for the rental expenses for your home office under section 8-1 of the ITAA 1997 as the rental expenses are considered expenses of a private or domestic nature.