Edited version of your written advice

Authorisation Number: 1013128171521

Date of advice: 28 November 2016

Ruling

Subject: Employee expenses

Question 1

Are you entitled to a deduction for the hours your employee carries out business activities?

Answer

Yes.

Question 2

Are you entitled to a deduction for the hours your employee carries out private and domestic duties?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 2016

The scheme commenced on:

2016

Relevant facts

You operate a business from home. The business is run solely from home. You use your home office for business purposes only.

You hired an employee on a casual basis to help you. The duties include helping with business activities, home and other domestic duties.

Assistance with the business activities is sporadic. Generally help with the business activities is done about once a month.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1.

Detailed reasoning

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, or relate to the earning of exempt income, or a provision of the ITAA 1997 prevents it.

A number of significant court decisions have determined that for an expense to be an allowable deduction:

● it must have the essential character of an outgoing incurred in gaining assessable income or, in other words, of an income-producing expense (Lunney v. FC of T; (1958) 100 CLR 478 (Lunney's case)),

● there must be a nexus between the outgoing and the assessable income so that the outgoing is incidental and relevant to the gaining of assessable income (Ronpibon Tin NL v. FC of T, (1949) 78 CLR 47), and

● it is necessary to determine the connection between the particular outgoing and the operations or activities by which the taxpayer most directly gains or produces his or her assessable income (Charles Moore Co (WA) Pty Ltd v. FC of T, (1956) 95 CLR 344; FC of T v. Hatchett, 71 ATC 4184).

Taxation Ruling TR 95/33 considers the issue of whether a deduction would be an allowable deduction by considering the subjective purpose, motive or intention in making the outgoing. The essential character of an expense is a question of fact to be determined by reference to all the circumstances.

It may be necessary to examine the taxpayer's subjective purpose where there is no obvious commercial connection with the business activity or where the expense does not achieve its intended result. If an arrangement has an independent pursuit of some other objective, then the outgoing may not be deductible.

Generally, where a business pays salary and wages to an employee, such expenses are an allowable deduction. However, if the employee also carries out private and domestic duties, then the associated wages are not an allowable deduction.

In your case you have an employee who assists with your business as well as domestic duties.

The expenses incurred in paying the employee wages for the time spent carrying out business activities is an allowable deduction.

However, the expense incurred in engaging an employee to help carry out home and domestic duties is not regarded as a business expense.

The courts and tribunals have considered child care expenses in many cases and have ruled that parents are not entitled to a deduction for child care expenses.

The deductibility of child care expenses was considered in Lodge v. FC of T (1972) 128 CLR 171; 3 ATR 254; (1972) 46 ALJR 575; 72 ATC 4174 where a single mother claimed a deduction for payment of nursery fees to enable her to work at home. The High Court held that child care expenditure was neither relevant nor incidental to the taxpayer gaining or producing assessable income and therefore was not an allowable deduction. The expenditure was deemed to be private and domestic in nature. This principle was affirmed in Jayatilake v FC of T (1991) 101 ALR 11; (1991) 22 ATC 125; 22 ATR 125; 91 ATC 4516.

In your situation, we acknowledge that you need someone to look after your children so that you can carry out your business activities, however the associated costs in caring for your children are a prerequisite of the derivation of that income and are not incurred in the course of carrying out your business duties. The cost of child care is not relevant or incidental to the production of your assessable income. In addition, the expenses are considered to be both private and domestic in nature.

Therefore you are not entitled to a deduction for the cost of taking or picking up children from day care or for someone to watch the children outside of day care hours. Even though incurring the expense enables you to earn assessable income, the expense is not incurred or directly related to how you carry out your business activities. The expenses remain domestic and private in nature and therefore not deductible.

Similarly, no deduction is allowable under section 8-1 of the ITAA 1997 for wages associated with other domestic duties.

As your employee does some work for your business as well as domestic and private duties, it is necessary to apportion your wage expenses into deductible and private.

To calculate the allowable business portion, you need to keep a record of the time you have an employee and the time (number of hours) spent doing business activities and the time spent doing other duties. The wages for the time spent doing business activities is an allowable deduction. The remainder of the wage expense is private in nature and not an allowable deduction under section 8-1 of the ITAA 1997.

Taxation Ruling TR 93/30 discusses the deductibility of home office expenses. A deduction is generally not allowable for the costs associated with a person's home as they are private in nature. However, a person who carries on income earning activities at home may be entitled to a deduction for part of the outgoings on the home.

As you use your office at home for your business activities, a deduction is allowable for the additional running expenses such as cleaning the office. Please note where the office is also used by others or for private purposes, only a portion of the office cleaning expenses is allowed. The cost of wages for having your employee clean your office is an allowable deduction. However the cost of wages for the time spent in cleaning other parts of the house is not an allowable deduction.