Edited version of your written advice

Authorisation Number: 1051222167603

Date of advice: 8 May 2017

Ruling

Subject: Home office expenses

Question

Are you entitled to deductions for occupancy expenses incurred including mortgage payments, strata fees, insurances and rates for your home office?

Answer

No.

This ruling applies for the following periods

Year ended 30 June 2009

Year ended 30 June 2010

Year ended 30 June 2011

Year ended 30 June 2012

Year ended 30 June 2013

Year ended 30 June 2014

Year ended 30 June 2015

Year ended 30 June 2016

Year ended 30 June 2017

The scheme commenced on

1 July 2008

Relevant facts

You are an employee.

Your Offer of Employment letter states you will be located in the Company's city A office. This letter further states:

Home Office

You are responsible for the provision and maintenance of a home office including the provision of a workstation, computer, fixed phone, facsimile/scanning machine, stationery and connection capabilities to the internet (Equipment).

You are responsible for ensuring your Home Office meets Occupational Health and Safety (OHS) standards.

The Company reserves the right to organize an ergonomic home office assessment to be performed at any time.

You receive a monthly equipment allowance and an annual car allowance.

You do not receive a home office allowance.

You initially worked at your employer's office, when they had their office in the suburbs. Your employer has since moved to the city. You attend your employer's office for team meetings.

You started working from home a few years ago.

Although there are additional costs of having your home office, it is more efficient for staff to work from home then having to commute to the city office after spending half the day visiting clients.

You suffer from medical problems and you prefer to work from home to help manage your problems.

You live in a strata complex.

Your home office is the lounge room in the unit. You sit on the lounge chair and have your home PC connected to the smart TV. A printer and coffee table are also in the lounge.

You visit clients most days and are required to do your own report preparation. The reports are usually done after hours and on the weekends.

Clients do not come to your home.

You live alone and work during the day and long hours at night and on the weekend as well. The work is mostly office work on the computer.

You use the kitchen and bathroom in conjunction with the home office when doing work.

You have two desks in your unit, which are mainly used for storage. The desks are not very comfortable to sit at for long periods of time.

Your lounge is also used for private purposes such as watching TV.

You use your spare bedroom to keep the required work files and equipment as well as other personal effects.

You have claimed a deduction for your electricity and running expenses for your home office. You have claimed these expenses using the ATO fixed rate.

You incur expenses for your mortgage payments, strata fees, insurances, council rates and water rates. You want to claim a deduction for these expenses for the full year.

Recently you raised a number of issues with your employer, including your home office. You no longer work for this employer.

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 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 established that, for an expense to satisfy the requirements of section 8-1 of the ITAA 1997:

● It must have the essential character of an outgoing incurred in gaining assessable income or, in other words, of an income producing expense    (Lunney and Hayley v. Federal Commissioner of Taxation (1958) 100 CLR 478; (1958) 11 ATD 404; (1958) 7 AITR 166)

● 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. Federal Commissioner of Taxation (1949) 78 CLR 47; (1949) 8 ATD 431; (1949) 4 AITR 236); 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 their assessable income (Charles Moore and Co Pty Ltd v. Federal Commissioner of Taxation (1956) 95 CLR 344; (1956) 11 ATD 147; (1956) 6 AITR 379 and Federal Commissioner of Taxation v. Hatchett (1971) 125 CLR 494; 71 ATC 4184; (1971) 2 ATR 5570.

A deduction is generally not allowable for the costs associated with a person's home as they are private in nature (Federal Commissioner of Taxation v. Faichney (1972) 129 CLR 38; 72 ATC 4245; (1972) 3 ATR 435).

An exception to this general rule is where the property is used for income producing activities and has the character of a 'place of business'. In such cases some of the expenses incurred in respect of the property may be partly deductible.

Taxation Ruling TR 93/30 Income tax: deductions for home office expenses discusses the deductibility of home office expenses. Home office expenses are divided into two broad categories - occupancy and running expenses. Occupancy expenses relate to the ownership of a home such as mortgage interest, 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, some part of the occupancy expenses may be claimed as a deduction. TR 93/30 provides guidelines as to when an area of the home has the character of a place of business.

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. This is likely to be the case where a part of a residence is set aside exclusively for the carrying on of a business by a self-employed person (for example, a doctor's surgery).

The following factors may indicate whether or not an area set aside 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 or almost exclusively for carrying on a business,

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

The existence of any of these factors or a combination of them will not necessarily be conclusive in determining whether the home constitutes a place of business in the ordinary and common sense meaning of the term. The determination will depend on a balanced consideration of the essential character of the area, the nature of the taxpayer's business and any other relevant factors.

It is not sufficient that a room in the home is used in association with a business. The fact that no other accommodation is available is not of itself sufficient to render a house as a place of business.

The circumstances where part of a home is considered to have the character of a place of business can be contrasted with the more common case where a taxpayer maintains an office or study at home as a matter of convenience (that is, so that he or she can carry out work at home which would otherwise be done at his or her regular place of business or employment).

TR 93/30 states that where a taxpayer maintains an office at home as a matter of convenience, the area of the home and the occupancy expenses incurred retain their private or domestic character (Handley v FC of T (1981) 11 ATR 644 ; 81 ATC 4165 and Forsyth v FC of T (1981) 11 ATR 657; 81 ATC 4157).

In Handley v FC of T 81 ATC 4165 the taxpayer was a barrister who purchased a home in 1969 as a family residence. One reason for purchasing the property was that it contained a room which the taxpayer considered would be suitable to use as his study. He used this room principally as a study and worked in it for 20 hours per week, 45 weeks of the year. In 1972, 1973 and 1974 the taxpayer claimed a proportion of the mortgage interest, council rates, taxes and insurance premiums as deductions attributable to the room used as a study. The majority of judges held that the expenses claimed were of a capital, private or domestic nature. Although the study was predominantly used for the purpose of the taxpayer's profession it remained an integral part of his home. The payments did not have the character of outgoings incurred in gaining or producing assessable income nor were they necessarily incurred in carrying on the taxpayer's profession. The High Court dismissed the appeals.

It is difficult for an employee to establish that their home is a 'place of business'. This is because the employee is not conducting a business in their own right and is usually provided with a place of work by their employer. In many cases, an employee may only choose to work at home at given times as a matter of convenience. However, as stated in paragraph 12 of TR 93/30:

'The absence of an alternative place for conducting income producing activities has also influenced a court or tribunal to accept a part of a taxpayer's residence as a place of business.

The courts supported this view in Swinford v FC of T (1984) 15 ATR 1154; 84 ATC 4803 where a self-employed script writer used one room of a flat for writing purposes and for meetings with television station staff. In this case the taxpayer lived in a one bedroom unit that she owned. She carried out her income earning activities in the lounge-dining room area, using the dining table as a desk. No claim for any deduction was made by the taxpayer in relation to those premises. The taxpayer sold the unit to raise sufficient income to pay rent on a larger unit with two bedrooms, one of which was to be used exclusively as a home office in which to carry out her income earning activities. Judge David J Hunt stated “I am satisfied by the taxpayer in this present case that the essential characteristic of her expenditure upon rent, so far as that expenditure related to the additional room which she rented to carry out her writing activities, was for the purpose of producing assessable income and was not of a capital, private or domestic nature.”

Case F53, 74 ATC 294 concerned an architect who conducted a small private practice from home. The character of area used for income producing purposes was examined. In this case, when handing down their decision, members O'Neill and Farleigh of the Board of Review stated “The character of the room in question is shown to be a work-room. It is designed as such and its purpose is a work-room. It was used virtually exclusively for the production of work which produced some part of the assessable income, particularly the work on private commissions. In these circumstances rent attributable to the work-room does not have the character of an outgoing of a private or domestic nature”. In this case the taxpayer was able to show that, as a matter of fact, there was no alternative place of business, it was necessary to work from home, and that the room in question was used exclusively or almost exclusively for income producing purposes.

The courts have also looked at the character of the expenditure and whether additional expenditure was incurred (beyond private or domestic requirements) for income producing purposes.

Based on the findings in these cases, it is considered that, for employees 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 was necessary to work from home; and

● the area of the home is used exclusively or almost exclusively for income producing purposes.

In your case, your unit or any part of it is not considered a 'place of business' because of the following factors:

● the home office area is not clearly identifiable as a place of business,

● the lounge and other areas used are readily suitable or adaptable (and are actually used) for private or domestic purposes in association with the home generally,

● the lounge is not used exclusively or almost exclusively for carrying on a business, and

● you do not meet clients at your unit.

Although the lounge is used for your work reports and other work activities, the room is also used for private or domestic purposes. The inclusion of a computer and some office furniture in the lounge area does not alter the area to such a degree that it cannot also be used for domestic purposes. It is acknowledged that you spend several hours each week conducting work-related activities in your lounge room. However you also watch TV in your lounge room.

Whilst it is acknowledged that your employer requires you to maintain a home office and meet OHS standards, this does not convert your home to a place of business. You are not self-employed and your home is not your sole base of operations. You carry out some work at home. You also visit clients and go to your employer's business premises to attend team meetings.

After consideration of the relevant factors, the Commissioner does not consider you to be conducting a business from your home. You are performing employee related duties from home. The essential character of your home office is that of a private study rather than a 'place of business'.

You do not incur additional occupancy expenditure for the purpose of producing assessable income. You would have had to pay the same amount of mortgage payments, strata fees, insurance and rates in respect of your unit regardless of whether you used your lounge or other room for work purposes. Hence, these occupational expenses including the portion that relates to your home office is considered to be of a private or domestic nature.

The fact that you use your lounge as a home office or store work documents at home does not change the character of the rooms from being private or domestic in nature. Your unit is your place of residence.

While your home office is used in connection with your income earning activities, it does not have the character of a place of business. Your occupancy expenses incurred are not sufficiently related to your income earning activities. Furthermore, the essential character of the expenses are of a private or domestic nature. Accordingly, no deduction is allowed for the associated occupancy expenses under section 8-1 of the ITAA 1997 or any other provision. That is, no deduction for any portion of your mortgage payments, rates, insurance and strata fees are allowed. The Commissioner has no discretion under the tax laws to make an exception.

However, since you perform income producing activities at home, you will be entitled to a deduction under section 8-1 of the ITAA 1997 for the running costs of your home office to the extent that the costs incurred relate to your income earning activities. That is, your home office deductions should be limited to your additional 'running expenses' incurred such as electricity.

Please note, that as your unit is not regarded as a place of business, the capital gains tax provisions are not relevant.