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Ruling

Subject: Home office expenses

Question

Is the Company entitled to a deduction for the cost of reimbursing home office occupancy expenses incurred by an employee?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 2012

The scheme commences on:

1 July 2011

Relevant facts and circumstances

The Company has one director and employee. Both positions are occupied by the single employee, who is paid a salary.

The Company's registered address and office is located at the sole employee's home address.

Approximately two thirds of the Company's income is earned from work performed at the office. These work activities include information analysis, report writing, report reviews and phone/email advice. Because of the nature of the business activities, it is not used for visits by your clients. The remaining business activities are performed at client sites, attending client meetings and conducting site visits. Other business activities performed at the office include administration, marketing, invoicing, taxation obligations and IT system setup. As such, it is the inherent nature of the business that the Company requires an office as a place of business to perform its activities. There is no alternative place of business.

The employee has dedicated a room in the residence as the Company's office, which is approximately 11% of the total floor area of the residence. The office space is not readily suitable or adaptable for private or domestic purposes, and is used exclusively or almost exclusively for carrying on the business activities.

The room is clearly identifiable as an office, containing two computer desks and chairs, two bookshelves, two computers, a laptop, a printer, other IT equipment, stationary, personal protective equipment, and a filing area for various reference, marketing and client commercial-confidential materials.

As the Company's sole employee incurs the majority of the business's running costs, including the office running and occupancy expenses, the Company reimburses the business expenses incurred by the employee when a reimbursement form is submitted to the Company.

The majority of the occupancy costs are calculated based on the floor area of the total residence used as an office, or where not adequate, a reasonable amount as advised by your tax agent.

The Company's registered address does not have signage identifying the business.

The income derived by the Company is personal services income (PSI), and is generated from the employee's knowledge, expertise and efforts. However the Company passes the results test, the 80% rule, and the unrelated client's test in relation to PSI.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1.

Reasons for decision

Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for any loss or outgoing to the extent that it is incurred in gaining or producing your assessable income, or it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income. However, you cannot deduct a loss or outgoing to the extent that it is capital, or of a private or domestic nature.

Generally, expenses associated with a taxpayer's home are private or domestic in nature and therefore do not qualify as allowable deductions for taxation purposes. However, where the home is used for income producing activities and has the character of a place of business, a deduction may be allowable for a portion of:

· occupancy expenses relating to ownership or use of a home. These include rent, mortgage interest, municipal and water rates and house insurance premiums, and

· running expenses relating to the use of facilities within the home. These include electricity charges for heating/cooling and lighting, cleaning costs, decline in value, and repairs to equipment (Taxation Ruling TR 93/30).

Place of business

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 or where part of the home is used as a taxpayer's sole base of operations for income producing activities (for example, where no other work location is provided to an employee by an employer).

TR 93/30 sets out the following criteria, none of which are necessarily conclusive on their own, to be considered in determining whether a home office is 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 income producing purposes

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

· it is a requirement inherent in the nature of the taxpayers activities that the taxpayer needs a place of business, and/or

· the taxpayers circumstances are such that there is no alternative place of business and it was necessary to work from home.

In your case, a part of your employee's residence is set aside and used exclusively or almost exclusively for carrying on a business. It is considered that the area is not readily suitable for private or domestic use.

Additionally, the home office is used as the Company's sole base of operations for income producing activities, and there is no alternative place of business.

Although the area is not clearly identifiable as a place of business, nor is it used regularly for visits of clients or customers, the nature of the business activities does not require it, as all client contact is either at their place of business attending meetings and conducting site visits, or via phone and email from your office.

As such, the room set aside for the Company to perform its income earning activities is considered a place of business.

Reimbursement of expenses incurred by employee

Where deductible expenses are incurred by an employee for the purpose of gaining or producing the Company's assessable income, the reimbursement of those expenses by the Company are considered deductible expenses to the Company under section 8-1 of the ITAA 1997.