Edited version of your private ruling

Authorisation Number: 1012520672486

Ruling

Subject: Occupancy expenses Deduction for home office expenses

Question 1

Are you eligible for a deduction for the cost of occupancy expenses to use your office under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 2

Is the deduction allowable under question 1:

i) For occupancy expenses - to be determined on a proportion of the total floor area basis;

ii) For running expenses - to be determined on a proportion of the total floor area basis; and

iii) For the decline in value of depreciating assets - to be determined on a percentage of business use basis?

Answer

Yes

This ruling applies for the following periods:

Year ended 30 June 2011

Year ended 30 June 2012

The scheme commences on:

1 July 2010

Relevant facts and circumstances

The background facts are:

· You were employed as a radio presenter.

· A recording studio was provided by your employer, however, due to limited facilities at the station, the studio was only provided to radio presenters just prior to the show. That is, minimal office or other work facilities were provided to prepare for the shows.

· Your duties included preparing and scheduling the content for each show.

· To adequately prepare, research and schedule the content for the show, you set up an office in your residence (the property).

· The use of the office in your home was not simply a matter of convenience.

· The office comprised a room at the front of the property, used extensively in preparing for your shows. The area had a separate lock and key to segregate it from the remainder of the property.

· Various office equipment and resources were self-funded by you to assist you with your preparatory tasks.

· The facilities in your office were critical in performing your duties of employment.

· In addition to preparing and researching the content for each show, you also held regular meetings in your office with producers and writers to discuss the scheduling and program of the shows.

· You provided details of the amount of square metres that was used as an office.

· The property was owned by a related party. You paid rent for the use of the property.

· In addition to rent, you incurred occupancy expenses and running expenses.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Reasons for decision

Question 1

Summary

Your costs for occupancy expenses incurred in using your office are deductible under section 8-1 of the ITAA 1997 because your office is considered to be your "place of business".

Detailed reasoning

Taxpayers who simply maintain an office or study in their homes where they can do income-producing work which it is not convenient to carry out at their normal place of work cannot claim deductions for mortgage interest, rates, rent, insurance or repairs referable to their home office. This is clearly established by the High Court decisions in Handley v FC of T 81 ATC 4165 ("Handley") and FC of T v Forsyth 81 ATC 4157 ("Forsyth").

Handley was an appeal by the taxpayer from the decision of the NSW Supreme Court (80 ATC 4351). The taxpayer was a barrister who purchased a home in 1969 as a family residence. One reason for purchasing the property was that it contained a room which the taxpayer considered would be suitable to use as his study. He used this room principally as a study and worked in it for 20 hours per week, 45 weeks of the year. In 1972, 1973 and 1974 the taxpayer claimed a proportion of the mortgage interest, council rates, taxes and insurance premiums as deductions attributable to the room used as a study. The majority of judges held that the expenses claimed were of a capital, private or domestic nature. Although the study was predominantly used for the purpose of the taxpayer's profession it remained an integral part of his home. The payments did not have the character of outgoings incurred in gaining or producing assessable income nor were they necessarily incurred in carrying on the taxpayer's profession. The High Court dismissed the appeals.

In Forsyth the Commissioner appealed from the decision of the Federal Court (80 ATC 4176). The taxpayer, a Melbourne barrister, carried on his practice from city chambers but regularly worked at home in the evenings. He and his wife purchased a house as trustees of a family trust. The trustees allowed him to pay $20 per week to use one room as a study together with some ancillary space. He was allowed to occupy the remainder of the premises as a residence provided he paid all outgoings, mortgage interest and maintenance costs. The room he used as a study was also used as a dressing room and a place to keep his clothes. This room was upstairs but the ancillary space, in which his desk was situated, was on the ground floor. The taxpayer claimed a deduction under subsection 51(1) of the Income Tax Assessment Act 1936 (ITAA 1936), being the predecessor to section 8-1 of the ITAA 1997, for payments he made to the trust for use of the room and the ancillary space. The Victorian Supreme Court and the Federal Court upheld the taxpayer's claim. The Commissioner appealed to the High Court and the appeals were allowed. The majority held that the 'rent' payable by the taxpayer did not have the essential character of an outgoing incurred on gaining or producing assessable income or necessarily incurred in carrying on the taxpayer's professional business.

Factors considered to support this conclusion were:

· the physical integration of the study and ancillary space with the rest of the home;

· the existence of a principal place of business elsewhere;

· doing work at home simply as a matter of convenience; and

· the absence of visits to the home by clients or others for purposes associated with his practice.

The payments of rent were excluded from deductibility as outgoings of a domestic nature.

Deductions are, however, available to taxpayers who, as a matter of fact, actually set aside an area of their private residence as a place of business, as stated in Taxation Ruling TR 93/30 (TR 93/30). TR 93/30 sets out the Commissioner's policy on deductions for home office expenses. In most cases this place of business will be clearly separate from the domestic residence, e.g. a workshop for a tradesman, or a doctor's or dentist's consulting rooms.

However, the fact that the area is not so obviously unsuitable for ordinary living purposes will not preclude a deduction. In Swinford v FC of T 84 ATC 4803 ("Swinford"), a self-employed script writer converted one bedroom of a rented flat into an office which was used solely for writing activities. No facilities were provided by the radio and television studios for whom the writer prepared scripts. The room was equipped with a desk, phone, typewriter and files. Clothes were also stored in the room. It was accepted that the taxpayer rented that particular flat because it had a second bedroom which could be used for writing activities. The NSW Supreme Court held that the part of the rent referable to the home office was deductible in that the expense was incurred for the purpose of earning assessable income and was not of a capital, private or domestic nature.

The following factors outlined in paragraph 5 of TR 93/30, none of which is necessarily conclusive on its own or in combination with others, may indicate whether or not an area that has been set aside has the character of a place of business:

· it is clearly identifiable as a place of business;

· it is not readily suitable or adaptable for use for private or domestic purposes in association with the home generally;

· it is used exclusively or almost exclusively for carrying on a business; or

· it is used regularly for visits of clients or customers

At paragraph 11 of TR 93/30 the Commissioner indicates that the decision in each case, as to whether a part of a home has the character of a place of business, "will depend on whether, on a balanced consideration of: the essential character of the area; the nature of the taxpayer's business; and any other relevant factors, the area constitutes a 'place of business' in the ordinary and common sense meaning of that term."

At paragraph 12 of TR 93/30 the Commissioner notes that "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."

As outlined in paragraph 13 of TR 93/30, it is the Commissioner's view that a place of business exists only if:

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

· the taxpayer's circumstances are such that there is no alternative place of business and it is necessary to work from home; and

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

In Case S16, 85 ATC 208, the taxpayer carried on a business of photogrammetry from a private residence. The taxpayer used the front room of the house exclusively for the purpose of work and was accordingly allowed a deduction for the proportion of mortgage interest, rates and insurance referable to that room. The Board also allowed a deduction for part of the telephone and electricity charges calculated on a usage basis, rather than a floor area basis.

Other examples of cases where occupancy expenses were allowed on the basis that the taxpayer had a separate 'place of business' in the home are:

· the office of a private resident company taxpayer, who was an authorised representative of an Australian Financial Services Licensee, in the front room of the main residence of the directors of the company was found to be a place of business - Murdoch v FC of T 2007 ATC 2570;

· an actuarial analyst studying to be an actuary who claimed a deduction for 15% of the rental cost (calculated as a percentage of total floor area) of her two-bedroom home on the basis that the second bedroom was used almost exclusively for study where the actuary course was conducted from the UK and where no study room was available with any associated institution in Australia - Lyons v FC of T 99 ATC 2258;

· an employee architect who did freelance work in a room in the home where one bedroom was used 'virtually exclusively' as a studio - Case F53, 74 ATC 294;

· a music teacher who gave lessons at home - Taxation Ruling TR 94/21;

· a clergyman who set aside a room in the house as an administration centre and for discussing problems with parishioners - Case Q54, 83 ATC 293;

· a sales representative for a publishing company who was not provided with an office but was required to maintain an office in the taxpayer's home to carry out work duties - Case U65, 87 ATC 415; and

· a territory manager of an oil company employed on a field basis whose home office was the sole base of his income producing activities. His employer did not provide him with office accommodation - Case T48, 86 ATC 389.

In your case it is considered that the home office you established in a room at the front of your residence has the character of 'a place of business'.

It is considered that your case can be distinguished from the Handley and Forsyth cases. You have demonstrated that, as a matter of fact, the work duties undertaken by you in your home office were not carried out as a matter of convenience. Instead, you have been able to show, as stated in paragraph 12 of TR 93/30 that "…as a matter of fact, there was no alternative place of business, it was necessary to work from home, and the room in question was used exclusively or almost exclusively for income producing purposes". It was a requirement inherent in the nature of the duties you performed for your employer that you needed to have a place of business.

Moreover, as in the Swinford case, the fact that your home office may not be so obviously unsuitable for ordinary living purposes does not preclude a finding that your home office is a place of business and that a deduction is therefore allowable for occupancy expenses.

The Commissioner considers that your situation is similar to the general run of cases discussed above and agrees with your analysis that given the practical imperative to provide your own segregated, special purpose and specially equipped office, your situation is akin to cases U65 and T48.

It is concluded that your home office is a place of business. Occupancy and running expenses relating to your home office are deductible pursuant to section 8-1 of the ITAA 1997, to the extent that they are incurred in earning your assessable income.

Question 2

Summary

Your occupancy and running expenses are to be determined on a proportion of the total floor area basis. Your costs for depreciation of assets are to be determined on a percentage of business use basis.

Detailed reasoning

At paragraph 15 of TR 93/30 the Commissioner considers that expenses that may be associated with a home office can be divided into two broad categories. These are:

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

· Running 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.

Occupancy expenses

Where a taxpayer's home qualifies as a place of business, the Commissioner advises at paragraphs 16 to 18 of TR 93/30, that in most cases the apportionment of the total occupancy expenses incurred on a floor area basis is the most appropriate method for calculating the actual amount of occupancy expenses that can be claimed by the taxpayer. However, where an area of the home is a place of business for part of the year only, it may be necessary for expenses to be apportioned on a floor area and a time basis.

In your case you are entitled to claim for occupancy expenses on a proportion of the total floor basis. You can claim a percentage of the total occupancy costs. However, your claim may need to be reduced to the extent that your home office may have only been used as a place of business for part of the year. The agreement you reached with your employer entitled you to annual leave. If you did not use your home office during your leave your claim should be further apportioned to reflect this reduced period of business use.

Running expenses

Where a taxpayer's home qualifies as a place of business, the Commissioner advises at paragraph 19 of TR 93/30, that in appropriate circumstances taxpayer's are entitled to a deduction for running expenses for the expenditure actually incurred through their income producing activities which is additional to their private expenditure.

In your case you are entitled to claim for running expenses for your home office for the difference between what was actually paid for the expenses and what would have been paid had you not worked from home. You should therefore generally claim these expenses on a usage basis rather than on a floor area basis such as was decided in Case S16. The Commissioner, at paragraph 24 of TR 93/30, considers that an appropriate formula for calculating the deductible component of the expenses to be:

(a) x (b) x (c) where

(a) is the cost per unit of power used;

(b) is the average units per hour used; and

(c) is the total annual hours used for income producing purposes.

However, the Commissioner concedes that the quantum of any allowable deduction for the additional expenses will be small and accordingly notes, at paragraph 25 of TR 93/30 that a bona fide estimate based on a reasonable percentage of the household annual fuel bill will be acceptable. In your case, notwithstanding the decision in Case S16, it is considered acceptable for such an estimate to be calculated on a proportion of the total floor area basis.

You are further entitled to claim depreciation expenses on assets which are used in your home office. The Commissioner advises, at paragraph 27 of TR 93/30, that where items used for business purposes are also utilised for domestic or private purposes, the taxpayer will need to reduce their deductions for the depreciating assets' decline in value in proportion to the extent that the assets are used for other than a taxable purpose. As such, it is acceptable for you to claim for depreciation expenses on a percentage of business use basis.