Edited version of your written advice

Authorisation Number: 1012674860325

Ruling

Subject: Home office

Question

Are you entitled to a deduction for home office occupancy and running expenses?

Answer

Yes

This ruling applies for the following period

Year ended 30 June 2014

Year ended 30 June 2015

The scheme commenced on

On or after 1 January 2013

Relevant facts

You are a sole trader.

You have a workshop which does not have space for an office.

You have set up a dedicated office in a spare room of your home.

You have installed solar panels on your roof.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Reasons for decision

Section 8-1 of the Income Tax Assessment Act 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.

However, a taxpayer who carries on part or all of their employment activities from home may be entitled to a deduction for part of the outgoings on the home. The deductions allowable depend on whether the home can be regarded as a place of business, or whether a room of the home is merely used as a study or home office.

The deductible expenses in respect of a home can be divided into two broad categories:

• Expenses relating to ownership or use of a home which are not affected by a taxpayers income earning activities (i.e. occupancy costs)

• Expenses relating to the use of facilities within the home (i.e. running costs)

If an area of the home has the character of a place of business, some of the expenses from both the above categories may be claimed as a deduction.

Whether an area of a taxpayer's home has the character of a place of business depends upon:

• The essential character of the area;

• The nature of the taxpayer's 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;

• The area is used exclusively or almost exclusively for income producing purposes;

• The area is used regularly for visits of clients or customers;

• The taxpayer requires a place of business;

• The taxpayer does not have an alternative place of business; and

• The area is used exclusively or almost exclusively for income producing purposes.

Based on the above information and the distinctions outlined in TR 93/30, we consider that the area set aside in your home is a place of business. 

Accordingly, you are entitled to a deduction for a proportion of the occupancy and running expenses.

The actual amount which can be claimed is dependent on your individual circumstances. Apportionment of the total occupancy expense incurred on a floor area basis is the most appropriate method in your circumstances.

Occupancy expenses

Occupancy expenses that may be claimed include interest on a loan to purchase the house, depreciation, insurance and rates.

In your case, you have had solar panels installed on your roof to help reduce power costs. The depreciation of the solar panels may also be included in your claim for occupancy expenses.

Running expenses

The amount that you are entitled to claim is the difference between what was actually paid for heating/cooling, lighting, cleaning and the decline in value of any office furniture you own and use and what would have been paid had you not worked from home.

Alternatively, the Commissioner accepts a deduction calculated at the rate of 34 cents per hour for the time when you use the room exclusively for work related purposes. This rate covers home office running expenses for electricity and the decline in value of office furniture.

In order to be entitled to claim home office running expenses at a rate of 34 cents per hour, you must keep a diary for at least a four week period to establish the work related use of the home office. It is not sufficient for you to state that you use your home office exclusively for work; you need to be able to substantiate your claim.