Edited version of private advice

Authorisation Number: 1012630791927

Ruling

Subject: Home office expenses

Question 1

Are you entitled to a deduction for the purchase and modification costs of the asset?

Answer

No.

Question 2

Are you entitled to a deduction for the running expenses of the office and workshop?

Answer

Yes.

Question 3

Will the capital gains tax (CGT) provisions apply to the sale of the asset?

Answer

No.

This ruling applies for the following period

Year ended 30 June 2014

Year ended 30 June 2015

The scheme commenced on

1 July 2013

Relevant facts and circumstances

You are an employee and your employer is allowing you to do part of your work from home.

You are considering purchasing an asset and retrofitting an office and workshop into it, both of which will be used as part of your employment.

The asset will be freestanding but will be powered from your house.

You plan to set up a meter for the power.

You also plan to keep records of the number of days per week you work from home.

The asset will be used solely for taxable purposes.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 section 40-25

Income Tax Assessment Act 1997 section 102-5

Income Tax Assessment Act 1997 subsection 118-10(3)

Income Tax Assessment Act 1997 subsection 108-20(1)

Income Tax Assessment Act 1997 subsection 104-235(1)

Reasons for decision

Detailed reasoning

Question 1

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.

For an expense to constitute an allowable deduction, it must be shown that they were incidental or relevant to the production of the taxpayer's assessable income (Ronpibon Tin NL & Tong Kah Compound NL v. Federal Commissioner of Taxation (1949) 78 CLR 47; (1949) 4 AITR 236; (1949) 8 ATD 431.

As a general rule, any expenses incurred which relate to the use or ownership of a home will be of a private or domestic nature, and therefore not deductible under section 8-1 of the ITAA 1997.

The cost of purchasing an asset is generally of a capital nature and is therefore not immediately deductible as an ordinary business expense. However, section 40-25 of the ITAA 1997 may allow a capital allowance deduction for the decline in value of a depreciating asset used for income-producing activities.

A depreciating asset is an asset that has a limited effective life and that is reasonably expected to decline in value over the time it is used. The asset your purchased is considered to be a depreciating asset.

You are not entitled to a deduction under section 8-1 of the ITAA 1997 for the purchase of the asset as it is capital in nature. However, you are entitled to a deduction for the decline in value.

Question 2

As a general rule, expenses associated with a taxpayer's home are of a private or domestic nature and are not tax deductible. However, in the case of a home office, there are two exceptions to this general rule. A deduction may be allowable if:

1. part of the home is used for income producing purposes and has the character of a 'place of business' or

2. part of the home is used in connection with a taxpayer's income earning activities but does not constitute a 'place of business'.

Taxation Ruling TR 93/30 states that home office expenses can be divided into two broad categories - occupancy and running expenses. Occupancy expenses relate to the ownership of a home such as rent, rates and insurance. Running expenses relate to the use of the facilities within the home such as electricity.

If an area of the home has the character of a 'place of business' then some part of both occupancy and running expenses may be deductible. However, where an area of the home is simply used in connection with income producing activities, but does not have the character of a place of business, only running expenses are allowable.

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. The following factors, none of which is necessarily conclusive on its own, may indicate whether or not part of the home has the character of 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 for carrying on of a business, or

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

A place of business will exist 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 of the home is used exclusively or almost exclusively for income producing purposes.

Based on the distinctions outlined in TR 93/30, we consider that the asset is more readily identifiable as a private home office used in connection with employment rather than as a place of business. Therefore, you are not entitled to a deduction for occupancy expenses as they are considered private and domestic in nature. However, you are entitled to a deduction for the running expenses of the home office.

Further issues for you to consider

The amount of the running expenses you are able to claim is the difference between what you actually paid and what you would have paid if you had not worked from home. The appropriate formula for calculating the additional expenses is set out in TR 93/30 which is available on our website www.ato.gov.au.

Question 3

Subsection 104-235(1) of the ITAA 1997 contains the rules dealing with CGT event K7.

CGT event K7 happens if:

a) a balancing adjustment event occurs for a depreciating asset held by the taxpayer; and

b) at some time while the taxpayer held the asset, the taxpayer used it or had it installed ready for use for a purpose other than a taxable purpose.

Unless the conditions of CGT event K7 are satisfied, any capital gain or loss arising from a CGT event that is also a balancing adjustment event for a depreciating asset is disregarded if the decline in value of the asset was worked out under Division 40 of the ITAA 1997 or Division 328, or would have been if the asset had been used. In particular, there are no CGT consequences from a balancing adjustment event if the depreciating asset was wholly used for a taxable purpose (in such a case, only the balancing adjustment provisions in subdivision 40-D would apply).

In this case, as the asset will be used wholly for taxable purposes there will be no CGT consequences when it is sold.