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Ruling

Subject: Home office expenses

Question 1

Are you entitled to a deduction for the modifications to your home?

Answer

No.

Question 2

Are you entitled to a deduction for the installation of a fax line?

Answer

No.

Question 3

Are you entitled to a deduction for a portion of your rent?

Answer

No.

This ruling applies for the following period:

Year ending 30 June 2013

The scheme commences on:

1 July 2012

Relevant facts and circumstances

Due to family reasons, you agreed with your employer that you would work from your home.

You rent a property as your home. You intend to use an area of the property as your home office. You will not use the area for any other purpose.

You will still attend your employer's principal office to meet with clients and you will travel to other work appointments from your home.

You intend to modify the area of the property that you will use as a home office to make it more suitable for that purpose. The landlord will not contribute any of the costs you incur.

You also wish to install a fax line. Your employer will be providing you with a mobile phone and laptop; however all fax, printing, stationery and internet expenses will be your responsibility.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Division 43

Reasons for decision

Summary

Your home office is not considered to be a place of business; rather it is considered that you use your home office for work purposes as a matter of convenience. Accordingly, occupancy expenses such as rent and capital works expenditure are not deductible.

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.  No deduction is allowable where the losses and outgoings are of a capital, private or domestic nature or are incurred to gain or produce exempt income.

Normally, expenses associated with a taxpayer's home are private or domestic in nature, and do not qualify as a deduction for taxation purposes. However, where the home has the character of a 'place of business', a deduction will be allowable for a proportion of 'occupancy expenses' such as rent, interest, repairs, capital works deductions and house and contents insurance, and 'running expenses' such as heating, lighting, cleaning and depreciation (Taxation Ruling TR 93/30).

If the home office is used in connection with the taxpayer's income producing activities, but does not constitute a 'place of business', only a proportion of the running expenses are allowable.

A capital works deduction is allowable under Division 43 of the ITAA 1997 for capital expenditure incurred on the construction of, or an extension, alteration or improvement to, certain income producing buildings. A capital works deduction is claimed at the rate of 2.5% of the capital expenditure. If your home office has the character of a 'place of business' you may be able to claim capital works deductions.

Place of business

Taxation Ruling TR 93/30 sets out the following criteria to be considered in determining whether a home office has the character of a 'place of business':

· 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, or

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

The absence of an alternative place for conducting income producing activities has also influenced a court or tribunal to accept a part of a taxpayer's residence as a place of business. In these cases however, a place of business will exist only if:

· it is a requirement inherent in the nature of the taxpayer's activities that the taxpayer needs a place of business;

· there is no alternative place of business and it was necessary to work from home; and

· the area of the home is used exclusively or almost exclusively for income producing purposes.

The circumstances where part of a home is considered to have the character of a place of business can be contrasted with the more common case where a taxpayer maintains an office or study at home as a matter of convenience (i.e., so that he or she can carry out work at home which would otherwise be done at his or her regular place of business or employment). TR 93/30 states that where a taxpayer maintains an office at home as a matter of convenience, the area of the home and the occupancy expenses incurred retain their private or domestic character (Handley v FC of T (1981) 11 ATR 644 ; 81 ATC 4165 and Forsyth v FC of T (1981) 11 ATR 657; 81 ATC 4157).

In your case, you will be working at home due to an agreement between you and your employer that allows for your family situation. We accept that you will use the area of the property in question exclusively for work purposes as a home office. However, it is not a requirement of your employment that you need to work from home, but rather you are working there as a matter of convenience. Accordingly, your home office is not considered to be 'a place of business'.

You wish to modify the area of the property you will use as a home office and install a fax line. These works are an alteration or improvement to the home and are considered to be capital works. As these expenses, along with rent expenses, are considered occupancy expenses, you are not entitled to a deduction for these expenses.

Further issues for you to consider

However, you are able to claim a deduction for the running expenses, for example, electricity and phone, fax and internet expenses (subsequent to the installation of the required lines). The amount of the running expenses you are able to claim is the difference between what you actually paid and what you would have paid if you had not worked from home. The appropriate formula for calculating the additional expenses is set out in TR 93/30 which is available on our website www.ato.gov.au.