Edited version of your private ruling

Authorisation Number: 1012541463056

Ruling

Subject: Home office occupancy expenses

Question

Are you entitled to a deduction a portion of rent expense relating to the use of your apartment for income producing purposes?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 2013

The scheme commences on:

1 July 2012

Relevant facts and circumstances

You run a business as a sole trader out of your rented two bedroom apartment.

Your children occupy one bedroom and the master bedroom is occupied by you and your spouse. The master bedroom contains a small alcove where you have an office desk containing a computer and printer. You also utilise a space behind the alcove as a part of the home office.

The home office area is a part of the master bedroom.

During business hours you use the living room, dining room and kitchen area to meet with clients. However after business hours the areas are used for private and domestic purposes.

You use the apartment three days per week, approximately eight hours a day for business's purposes.

There is no signage at the apartment to identify it as a place of business. However the address is listed on all advertising for the business.

It is necessary that you have a place of business to carry out your income earning activities.

You do not rent an alternative office space for income producing purposes and you do not use the apartment as a home office as a matter of convenience.

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 all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income or are necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature.

The costs associated with a taxpayer's home are normally of a private or domestic nature and do not qualify as deductions for taxation purposes (Federal Commissioner of Taxation v. Faichney (1972) 129 CLR 38; 72 ATC 4245; (1972) 3 ATR 435).

The only exception to this general rule is where part of the home is used for income producing activities and has the character of a 'place of business'. In such cases some of the expenses incurred in respect of the home such as rent may be partly deductible.

Taxation Ruling TR 93/30 discusses the deductibility of home office expenses, which identifies when an area of the home has the character of a 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 (for example, a doctor's surgery). Another example is where part of the home is used as a taxpayer's sole base of operations for income producing activities (e.g., where no other work location is provided to an employee by an employer).

In deciding cases concerning home office expenses, courts and tribunals have identified the following factors that may indicate whether or not an area set aside has the character of a 'place of business':

o the area is clearly identifiable as a place of business

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

o the area is used exclusively or almost exclusively for carrying on a business, and

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

The existence of any of these factors or a combination of them will not necessarily be conclusive in ascertaining the character of an area used as a home office. Rather, a decision will depend on whether, on a balanced consideration of:

o the essential character of the area;

o the nature of the taxpayer's business; and

o any other relevant factors,

the area constitutes a "place of business" in the ordinary and common sense meaning of that term.

In Case F53, 74 ATC 294; Case 65 , 19 CTBR(NS) 452, the character of areas used for income producing purposes was examined. In this case, when handing down their decision, members O'Neill and Farleigh of the Board of Review stated "The character of the room in question is shown to be a work-room. It is designed as such and its purpose is a work-room. It was used virtually exclusively for the production of work which produced some part of the assessable income, particularly the work on private commissions. In these circumstances rent attributable to the work-room does not have the character of an outgoing of a private or domestic nature".

The courts have also looked at the character of the expenditure and whether additional expenditure was incurred (beyond private or domestic requirements) for income producing purposes.

In Swinford v FC of T (1984) 15 ATR 1154; 84 ATC 4803, a taxpayer lived in a one bedroom unit that she owned. She carried out her income earning activities in the lounge-dining room area, using the dining table as a desk. No claim for any deduction was made by the taxpayer in relation to those premises. The taxpayer sold the unit to raise sufficient income to pay rent on a larger unit with two bedrooms, one of which was to be used exclusively as a home office in which to carry out her income earning activities.

In this case judge David J Hunt stated "I am satisfied by the taxpayer in this present case that the essential characteristic of her expenditure upon rent, so far as that expenditure related to the additional room which she rented to carry out her writing activities, was for the purpose of producing assessable income and was not of a capital, private or domestic nature."

In your case, the apartment is not considered a 'place of business'. It is not clearly identifiable as, and does not have the character of, a place of business, and although on occasions you do meet clients at the apartment, the areas used are readily suitable or adaptable (and are actually used) for private or domestic purposes in association with the home generally.

Further, as the private or domestic requirement of your family is a two bedroom apartment, the expenditure on rent is private or domestic in nature. You do not incur additional expenditure for the purpose of producing assessable income. The fact that you use a small part of your bedroom as a home office does not change the character of the room from being private or domestic in nature.

As such you are you cannot claim a deduction for the portion of rent associated with areas used in your business activity under section 8-1 of the ITAA 1997.