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Ruling

Subject: Deduction-home office

Question:

Is the company entitled to a deduction for the rent and running expenses of a property paid by the directors?

Answer:

No

This ruling applies for the following period

Year ended 30 June 2012

The scheme commenced on

1 July 2011

Relevant facts

The company operates a business in town A.

The director's main residence is located in town B.

The directors leased a property in town A.

The directors of the company pay the rent and running expenses for the leased property.

There is no loan account or agreement with the company to pay the rent and running costs of the property.

The directors leased the property because they have to start work early in the morning and finish work late in the evening and it's not convenient for them to commute between town B and town A.

The directors used the living area of the property to undertake banking, order stock, maintain business accounts, call suppliers and other business related paper work.

The company stores some of it stock at the property as the business has limited space and does not have a locked storage area.

The company's stock is not delivered to the property in town A.

The directors used the work area of the unit a number hours a week.

The directors stay at the property in town A number of nights a week.

The property in town A is not a place of business.

The property in town A is not visited by clients or customers.

The directors and their family members have access to the property in town A

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 subsection 8-1(1) 

Income Tax Assessment Act 1997 subsection 8-1(2)

Reasons for decision

Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) refers to general deductions. It states:

(1) You can deduct from your assessable income any loss or outgoing to the extent that:

(a) it is incurred in gaining or producing your assessable income; or

(b) it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income.

(2) However, you cannot deduct a loss or outgoing under this section to the extent that:

(a) it is a loss or outgoing of capital, or of a capital nature; or

(b) it is a loss or outgoing of a private or domestic nature; or

(c) it is incurred in relation to gaining or producing your exempt income; or

(d) a provision of this Act prevents you from deducting it.'

A number of significant court decisions have determined that, for an expense to satisfy the tests outlined in section 8-1:

(a) it must have the essential character of an outgoing incurred in gaining assessable income or, in other words, of an income-producing expense (Lunney v Federal Commissioner of Taxation (1958) 100 CLR 478); 11 ATD 404;

(b) there must be a nexus between the outgoing and the assessable income so that the outgoing is incidental and relevant to the gaining of assessable income (Ronpibon Tin NL v Federal Commissioner of Taxation (1949) 78 CLR 47);

(c) it is necessary to determine the connection between the particular outgoing and the operations or activities by which the taxpayer most directly gains or produces his or her assessable income (Charles Moore & Co (WA) Pty Ltd v Federal Commissioner of Taxation (1956) 95 CLR 344; (1956) 30 ALJ 602; [1957] ALR 68; 11 ATD 147; Federal Commissioner of Taxation v Hatchett (1971) 125 CLR 494; 45 AJLR 565; (1971) 2 ATR 557;71 ATC 4184).

In the company's case, the expenses were incurred by the directors and not by the company as the company had no legal obligation to pay the expenses on behalf of the directors.

A company is considered to be a separate legal entity. This was established in Salomon v Salomon & Co (1897) AC 22, where it was stated by Lord Halsbury LC at 30 that, 'once the company is legally incorporated, it must be treated like any other independent person, with its rights and liabilities appropriate to itself'.

It follows, that any expenses attributable to the company may only be claimed as a deduction by the company, and by no other entity. Similarly any expenses attributable to a director on behalf of the company may only be claimed as a deduction by the individual director of company, and by no other entity

An expense is not deductible under section 8-1 unless it is incurred in gaining or producing the assessable income of the entity who incurs it. This principle emerged from the case Federal Commissioner of Taxation v Munro (1926) 38 CLR 153, where the taxpayer's interest expense was not an allowable deduction because it was not incurred in gaining his assessable income.

Other cases have reaffirmed this principle. In (1961) 11 TBRD Case L86, the taxpayer, who was managing director of a company, paid amounts to the company to enable it to pay its debts. It was held that the deduction was not allowable because the taxpayer did not incur the expenses in gaining or producing his assessable income.

It is apparent from the above case law that expenses are only allowed with respect to the person/entity who incurred them. On this basis the rent and running expenses of the property were not incurred by the company, but by directors and the company is not able to claim deductions for these expenses under section 8-1 of the ITAA 1997.