Edited version of private advice

Authorisation Number: 1012623933562

Ruling

Subject: Rent expense

Question

Are you entitled to a deduction for rent paid?

Answer

No

This ruling applies for the following period

Year ended 30 June 2013

The scheme commences on

1 July 2012

Relevant facts and circumstances

It is a requirement of your employment to live close to the project.

You rent a property close to your workplace.

You have your own property, which you have vacated in order to live on site. The property remains vacant.

You were in receipt of a Living Away From Home Allowance (LAFHA) from your employer.

As a result of changes in the LAFHA regulations your employer decided that the LAFHA would only be paid for a maximum of two years.

After two years your LAFHA ceased to be paid by your employer.

You continue to work the same role but are now required to pay your rent out of your after tax wages.

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, except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income.

As a general rule, expenditure on accommodation while working away from home is not allowed as a deduction. These costs are essentially 'living expenses' of a private or domestic nature. The fact that income cannot be earned unless these expenses are incurred is not determinative of deductibility. The expenses are a prerequisite to the earning of assessable income rather than being incurred in the course of gaining that income (Lunney & Hayley v. Federal Commissioner of Taxation (1958) 100 CLR 478; (1958) 7 AITR 166; 77 ATC 4076).

The issue of expenses incurred in relation to accommodation near the workplace while maintaining a family residence in another location was considered in the cases of Federal Commissioner of Taxation v. Toms 89 ATC 4373: (1989) 20 ATR 466 (Toms' Case) and Federal Commissioner of Taxation v. Charlton 84 ATC 4415; (1984) 15 ATR 711 (Charlton's Case).

These cases established that accommodation expenses incurred by an individual who lives away from home to carry out the duties of their employment will not be deductible. Expenses of this nature were found to be private in nature and incurred before or after the activity of earning assessable income.

In Charlton's Case, the taxpayer was a pathologist employed to carry out autopsies for the local coroner in Bendigo. He rented a flat in Bendigo in order to avoid excessive travelling and fatigue, while maintaining a permanent family home in Melbourne, located approximately 150 kilometres away. The taxpayer claimed that the rental was incurred in the production of assessable income, but the Court ruled that the expense of accommodation was considered private and domestic in nature and would not be deductible under section 8-1 of the ITAA 1997.

Similarly, the Federal Court in Toms' Case disallowed a forest worker's deduction for the cost of maintaining a caravan and other living expenses. The taxpayer incurred the expenses in providing temporary accommodation at the base camp. These expenses were dictated not by work but by private considerations. Therefore the essential character of the expenditure was considered to be of a private or domestic nature.

An employer's requirement that an employee incur expenditure which is not related to income-producing activities does not convert that expenditure into a deductible outgoing (FC of T v. Cooper 91 ATC 4396 at 4414; (1991) 21 ATR 1616 at 1636 (Cooper's case)).

In Cooper's case the taxpayer was a professional footballer who was ordered by his coach to eat large quantities of particular foods as he needed to gain weight. If he did not gain this weight, he would be dropped from first grade to reserve grade and this would drastically reduce his income. The courts found that whilst the expense affected his income, gaining weight was not part of his income earning activities and the expense of purchasing additional food remained private.

In Cooper's case Hill J said: 

...the fact that the employee is required, as a term of his employment, to incur a particular expenditure does not convert expenditure that is not incurred in the course of the income producing operations into a deductible outgoing.

In your case, you incur expenses for renting accommodation to enable you to live close to the project to fulfil part of your employment contract. The expenses would not have been incurred but for the requirement by your employer to live close by. However, the expenses are a prerequisite to the earning of assessable income. As in Cooper's case, the expenditure does not convert to expenditure incurred in the course of producing your income because it is a requirement of your employment contract. The expenses are incurred in order to enable you to earn income but are not incurred in the course of gaining or producing that income.

The fact that you do not receive any allowances from your employer towards accommodation or living expenses does not change the nature of the expenses. These expenses remain private in nature.

No deduction is allowable under section 8-1 of the ITAA 1997 for the rent expenses you incur.