Edited version of your private ruling

Authorisation Number: 1012585431036

Ruling

Subject: Real property test

Question 1

Did your business activity pass the real property test in the relevant financial years?

Answer

No.

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

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You run a business.

You offer both face to face and virtual services.

You conduct your business from your rented unit.

The unit is a X bedroom apartment with a balcony.

The unit is valued at over $X.

You passed the assessable income test in your third year of operation.

You utilise a number of rooms in your rented apartment to conduct your business including an office and a storage room.

There is a large lounge room with a conference table for meeting with clients. The lounge has a couch and television in one corner. You estimate that the room is used 25% for private purposes.

You see clients every day in your lounge meeting area and there is signage hanging on the wall with your business logo.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 35-10(2).

Income Tax Assessment Act 1997 Section 35-40.

Income Tax Assessment Act 1997 Section 35-50.

Reasons for decision

Summary

In order to be a place of business, a room must be exclusively or almost exclusively used for business purposes. A mixed use room whose use is fundamentally private and domestic in nature will not be almost exclusively used for business and therefore not included in the business use calculation.

Detailed reasoning

The real property test in section 35-40 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the loss deferral rule in subsection 35-10(2) of the ITAA 1997 does not apply to defer any loss incurred by the individual from the activity for that income year if real property of at least $500,000 in value is used in the business activity on a continuing basis.

Real property includes:

· land

· interests in land such as leases

· structures, such as buildings, fixed to the land.

Real property, for the purposes of this test, does not include:

· a dwelling and adjacent land that is used mainly for private purposes; or

· fixtures owned by you as a tenant.

To value real property or interests in real property, the individual can choose the reduced cost base, or the market value of the property or interest in real property if that value is more than the reduced cost base (subsection 35-40(2)). The meaning of reduced cost base is the same as it is for capital gains tax purposes. This meaning is to be found in Subdivision 110-B.

Where assets that have been taken into account for the real property test are partly used in the relevant business activity and partly for some other purpose(s), only that part of their value that is attributable to their use in the business activity for that year can be taken into account (section 35-50 of the ITAA 1997).

Taxation Ruling TR 93/30 (TR 93/30) states that in determining whether the area set aside qualifies as a place of business, the Commissioner will consider the following factors:

· whether the area is clearly identifiable as a place of business

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

· whether the area is used exclusively or almost exclusively for business purposes

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

In addition to the above factors, the Commissioner's decision will depend on whether, on a balanced consideration of the essential nature 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 the term.

In some cases where a taxpayer uses their home for income-producing purposes, there will be work areas which have a mix of business and private use.

The use of the term 'almost exclusive' in TR 93/30 contemplates something less than exclusive business use of an area still qualifying as a business area. In practice, for those areas of the home which have mixed business and private use, where the private use is more than marginal it would be difficult to classify it as a place of business.

That would be particularly the case for facilities whose use is fundamentally private in nature and part of the normal enjoyment of a private home. The use of such facilities either directly or indirectly in connection with business would not transform them from areas which are fundamentally private and domestic in nature. As a consequence, you would not be entitled to include any areas not used exclusively or almost exclusively by you as a place of business in your 'business use' portion of total floor space.

In your case, you operate a business from your rented apartment. The apartment has a value of over $X. Of your total floor space, Y bedrooms are used exclusively for business purposes. These rooms account for 23% of the total apartment floor space. The lounge is used for both business and private purposes but you believe the private use of lounge would be approximately 25%. Although you see clients on a regular basis, a lounge is by nature for private or domestic purposes. The lounge is not exclusively or almost exclusively used for business purposes.

Therefore the lounge floor space cannot be taken into consideration when calculating the business use of your apartment. The total business use of the apartment is 23% and you do not pass the real property test.

Further issues for you to consider

Where you cannot offset your business loss against any of your other assessable income in a financial year, your loss is simply deferred to future years. If your business makes a profit in a following year, you can offset the deferred loss against the amount of this profit..