Edited version of your written advice

Authorisation Number: 1051410890975

Date of advice: 2 November 2018

Ruling

Subject: GST / IT / FBT

Question 1

Is the GST paid on expenses to renovate a residential garage into an office and working station for business purposes claimable under section 11-20 of A New Tax System (Goods and Services Tax) Act 1999 (GST Act 1999)?

Answer

No

Question 2

Is the expense incurred to renovate a residential garage into an office and working station for business purposes capital works under Division 43 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 3

Is the expense incurred for depreciable assets under Division 40 of the ITAA 1997?

Answer

Yes

Question 4

Is the company vehicle that is used for multiple purposes subject to Fringe Benefit Tax under the Fringe Benefits Tax Assessment Act 1986 (FBTAA 1986)?

Answer

Yes

This ruling applies for the following period:

Year ending 30 June 2018

The scheme commences on:

1 July 2017

Relevant facts and circumstances

The Director as an individual is a specialist technician operating as the sole director of The Company.

The Company provides the following services:

● Rental of specialist monitoring equipment

● Repair and maintenance of the specialist related detection equipment, appliance repair and electrical test and tag

● Sale of specialist monitoring equipment

The Company operates from the garage of the Director’s principal place of residence.

The Company pays rent of $X per week to the Director as an individual for the use of the garage space.

The Company’s clients drop off and collect items that require fixing at the Director’s residential place of business.

In quarter three of the 2018 financial year, the Director renovated part of the garage, at their residential property. The Director converted their residential garage into a home office and working space to store equipment and to fix equipment for The Company’s clients.

Other costs associated are:

● purchasing alarms

● TV

● office furniture

● The business address is advertised on business cards; hence, clients can come to the premise and drop off the equipment in the designated place in the front yard. Because of this, the Director installed an anti-theft fence around the house for the sole purpose of not letting the goods be stolen.

The total costs incurred is over $XY,000 including GST

There are locks on the garage door and this adjoins to the main residence by a wall.

Photographs show additions of office furniture such as chair, desks and cabinets, TV, tiled floors and new walls.

The Director has self-assessed their personal income derived from the business would satisfy the results test and it would be personal service’s income.

Fringe Benefits Tax

Two vehicles are registered under The Company:

● 1 sedan

● 1 wagon

These Company vehicles are used to see clients and logbooks have been kept for these events to capture the business percentage and private percentage.

Your tax agent has self-assessed the employee contributions have reduced the FBT to nil for The Company.

The Director is also a full time employee of Employer B. This is separate employment.

The Director undertakes travel to see clients for Employer B using The Company’s vehicle and a diary is kept for these events.

The Director receives a car allowance from Employer B which appears on their payment summary.

The Director intends to claim only the car expense using the business percentage as documented from the logbook for The Company and intends not to claim any deductions for any personal purpose.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Section 11-20

Income Tax Assessment Act 1997 Division 40

Income Tax Assessment Act 1997 Subsection 40-30(1)

Income Tax Assessment Act 1997 Subsection 40-30(3)

Income Tax Assessment Act 1997 Subsection 40-45(2)

Income Tax Assessment Act 1997 Section 40-95

Income Tax Assessment Act 1997 Section 43-20

Fringe Benefits Tax Assessment Act 1986

Reasons for decision

Detailed reasoning

Question 1

Section 11-20 of the GST Act 1999 provides that you are entitled to the input tax credit for any creditable acquisition that you make.

You make a creditable acquisition if:

a) you acquire anything solely or partly for a creditable purpose; and

b) the supply of the thing to you is a taxable supply; and

c) you provide, or are liable to provide, consideration for the supply; and

d) you are registered, or required to be registered.

In your case you are registered for GST and you have engaged others to renovate the premise.

Where the supply of the construction services to you is a taxable supply and you acquire the renovation acquisitions for a creditable purpose you will be entitled to input tax credits.

Section 11-15 provides that you acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your enterprise. However, you do not acquire the thing for a creditable purpose to the extent that:

(a) the acquisition relates to making supplies that would be input taxed; or

(b) the acquisition is of a private or domestic nature.

When the company allows individuals to live in a house which is a company asset, this is considered to be an informal lease or license arrangement. In this case, the house is not a company asset.

Section 40-35 provides that a supply of premises by way of lease, hire or license is input taxed if the supply is of residential premises other than a supply of commercial residential premises. We do not consider your house meets the definition of commercial residential premises.

Section 195-1 defines residential premises to mean land or a building that:

● is occupied as a residence or for residential accommodation, or

● is intended to be occupied, and is capable of being occupied as a residence or for residential accommodation.

(regardless of the term of the occupation or intended occupation) and includes a floating home.

Goods and Services Tax Ruling GSTR 2012/5 Goods and services tax: residential premises (GSTR 2012/5), provides guidance on the meaning of the term residential premises.

Paragraph 9 of GSTR 2012/5 states:

The requirement in sections 40-35, 40-65 and 40-70 that premises be 'residential premises to be used predominantly for residential accommodation (regardless of the term of occupation)' is to be interpreted as a single test that looks to the physical characteristics of the property to determine the premises' suitability and capability for residential accommodation.

Further, paragraph 15 of GSTR 2012/5 provides that premises must provide shelter and basic living facilities.

We consider that the house in its entirety provides shelter and basic living facilities, displaying the physical characteristics of residential accommodation.

You have advised that one room in the house has been set aside as an office and working space for the director to conduct the enterprise.

The office and working space is:

● the internal garage

● not separate to the house

● forms an integral part of the house

Although the use of this part of the house is different to the balance of the house the 'office' has no distinguishing features that would set it apart from the characterisation of residential premises.

Therefore, we consider that the premises from which the business is supplied, satisfies the definition of residential premises under section 195-1.

You have incurred costs relating to installation of an alarm, anti-theft fence around the house and renovating the garage into a home office. These expenses are considered to be private in nature.

Based on the above, it is considered to be a residential premise, you have not acquired the renovation on the building for a creditable purpose and you are not entitled to input tax credits on the renovation expenses.

However, you are entitled to claim the input tax credits for depreciable items (i.e. office furniture, computer, and phones) and apportionment should be considered for the private use.

Questions 2 & 3

Division 43 Deductions for capital works

Section 43-20 Income Tax Assessment Act 1997 (ITAA 1997) states that a building, or extension, an alteration or improvement to a building would be considered capital works. Subsection 40-45(2) of the ITAA 1997 states that capital works will not be deductable as depreciating assets under Division 40 ITAA 1997. This ensures that only owners and certain lessees of capital works, and certain holders of quasi-ownership rights over land on which capital works are constructed, can deduct an amount under this Division.

Are the assets an ‘improvement’?

Paragraph 44 of Taxation Ruling 97/23 Income tax: deductions for repairs provides the Commissioner’s view that an improvement provides a greater efficiency of function in the property.

It involves bringing a thing or structure into a more valuable or desirable form, state or condition than a mere repair. Some factors that point to work done to property being an improvement include whether the work will extend the property's income producing ability, significantly enhance its saleability or market value or extend the property's expected life.

Here, the sprung floors, vinyl floor covering, mirrors and ballet barres have been installed in the leased building with the intention of removing them at the end of the lease period; therefore, they do not extend the property's income producing ability, enhance the property’s saleability, market value or extend the property's expected life. On these facts the assets are not considered an improvement.

Are the assets an ‘entirety’?

Paragraph 37 of Taxation Ruling 97/23 states that an entirety is a term used by the courts to refer to something ‘separately identifiable as a principal item of capital equipment’, 'a physical thing which satisfies a particular notion', and 'not necessarily the whole but substantially the whole of the [property] under discussion'.

Property is more likely to be an entirety if:

● the property is separately identifiable as a principal item of capital equipment; or

● the thing or structure is an integral part, but only a part, of entire premises and is capable of providing a useful function without regard to any other part of the premises; or

● the thing or structure is a separate and distinct item of plant in itself from the thing or structure which it serves; or

● the thing or structure is a 'unit of property' as that expression is used in the depreciation deduction provisions of the income tax law.

Examples of property that constitute an entirety are a spectators' grandstand in a football stadium, a bridge giving access to the driveway of a garage, or a factory drainage system comprising an underground system of concrete stormwater drains. Examples of property that do not constitute an entirety are the insulation and lining for a cool room, or a window in a factory. Something that is part of a building, e.g., a roof or wall, is just that and no more. The building itself is the entirety.

Here, the sprung floors, vinyl floor covering, mirrors and ballet barres are for the specific use of training dancers. They provide a useful function separate to the premises and are separate and distinct from the premises by the fact that they can be removed from the premises without damage. On these facts the assets are entireties.

Paragraph 33 of Taxation Ruling 97/23 states that capital expenditure that is not deductible as a repair, and the item is not a permanent fixture, may be classified as plant (a depreciating asset) on which depreciation is allowable.

Division 40 Capital allowances

Subsection 40-30(3) of the ITAA 1997 states that fixtures and improvements to land, whether removable or not, are assets separate from the land. Therefore, a fixture that has a limited effective life and can reasonably be expected to decline in value over the time it is used may be a depreciating asset. Land is specifically excluded from the definition of a depreciating asset under subsection 40-30(1) of the ITAA 1997.

In your case, we consider the office furniture, TV, computer, and phones depreciating assets and apportionment should be considered for the private use. We consider the alarm and anti-theft fence to be private in nature and are therefore not deductible expenditure.

Taxation Ruling 2017/2 Income tax: effective life of depreciating assets (applicable from 1 July 2017) contains the Commissioner’s view on depreciating assets and industries specific to the ruling. Alternatively, the effective life of a depreciating asset may be self-assessed in accordance with section 40-95 of the ITAA 1997.

Capital expenses

Division 43 of the ITAA 1997 provides a deduction for certain capital works. Capital works includes buildings and structural improvements, and also extensions, alterations or improvements to buildings and structural improvements where a residential property is used for income producing purposes.

Subsection 43-25(1) of the ITAA 1997 provides that the rate of deduction for capital works which began after 26 February 1992 for a residential rental property is 2.5%. However, a deduction cannot be made prior to the completion of the capital works (section 43-30 of the ITAA 1997).

In your case a deduction is allowed under Division 43 of the ITAA 1997 for the works carried out on the garage upon completion.

A deduction is only available for the number of days that the property is rented, or available for rent, in any income year from the date that the works are completed.

A capital works deduction is generally claimed at a rate of 2.5% over 40 years. The works that have been carried out at the business premise are considered to be capital expenses.

Question 4

There are circumstances in which the private use of a car may be exempt from FBT.

Under sub-section 8(2), a vehicle may qualify for the exemption if, while classified as a car for the purposes of the FBTAA, it is a taxi, panel van, utility truck or any other road vehicle that, while designed to carry a load of less than one tonne, is not designed for the principal purpose of carrying passengers and there was no private usage of the vehicle other than:

● between the employee's residence and place of employment;

● use which is incidental to travel in the course of duties of employment; and

● non-work-related use that is minor, infrequent and irregular

The following types of vehicles (including four-wheel drive vehicles) are cars:

● motor cars, station wagons, panel vans and utilities (excluding panel vans and utilities designed to carry a load of 1 tonne or more);

● all other goods carrying vehicles with a designed carrying capacity of less than 1 tonne;

● all other passenger-carrying vehicles with a designed carrying capacity of fewer than 9 occupants.

Vehicles which are not classified as cars may qualify for the exemption under sub-section 47(6) if the private use of such vehicles is restricted to the use which is outlined above.

As the cars that are provided to the employees of the company are not a taxi, panel van, utility or other commercial vehicle they can only be exempt if the design of the cars is not for the principal purpose of carrying passengers.

The cars supplied by the company to the employees are designed for the principal purpose of carrying passengers; therefore this exemption will not apply.

Consequently, the use of the cars will give rise to taxable fringe benefits under section 7 of the FBTAA.

The FBTAA provides two alternative methods of valuing such benefits:

● the statutory formula method

● the operating cost method

The statutory formula method under section 9 of the FBTAA is the default method.

To use the operating cost method under section 10 of the FBTAA the company needs to elect to only use this method.

Where the employer elects to use the operating cost method the taxable value will be reduced to nil where the "business use percentage" is 100 percent.

Subsection 136(1) of the FBTAA defines "business use percentage" as the number of business kilometre travelled by the car during the holding period divided by the total number of kilometres travelled by the car during the holding period.

Under particular circumstances travel to and from work can be treated as business related e.g. where the taxpayer's job is itinerant.

Private Usage

Chapter 7 of the publication ‘Fringe benefits tax: a guide for employers’ (the employers guide)) is an ATO view document which states:

‘The private use is use of an employer’s car by an employee or their associate that is not for income producing purposes of the employee or associate.’

Therefore, FBT is payable on the income producing usage as an employee & any personal usage is considered private in nature.

In relation to your circumstances, although the two vehicles in question travel for business in both capacities, a portion of the travel incurred is for:

● personal usage, and;

● non-income producing related use under The Company.

Therefore, both these events are considered to be private usage under FBT.

Reportable Fringe Benefits

From 1 April 1999 employers are required to record the grossed up taxable value of fringe benefits on the group certificates of any employee who receives relevant benefits with a total taxable value exceeding $1000.

Taxable value of car fringe benefit - Operating Cost Method

Under section 10 of the FBTAA, the taxable value of a car fringe benefit is the total cost of operating the car during the FBT year calculated using the formula:

(C x (100% - BP)) – R

Where:

C = operating cost of the car

BP = business use percentage

R = the amount of any employee contribution

Therefore, the taxable value of the car fringe benefit will be reduced by the business use percentage applicable to the car during the period. The amount of any employee contributions is deducted from thereafter.

The business use percentage is a percentage of business travel compared to total travel of the car during the period.

Logbook and odometer records are required to be maintained for the purposes of calculating the business use percentage.

Employee contribution

The ‘Fringe benefits tax: a guide for employers’ determines the following costs incurred by the employee can be treated as employee contributions:

● the payment is a cash payment made by an employee to you or the person who provided the benefit. The employee or recipient's contribution must be made from the employee's after-tax income.

● An employee or recipient's contribution may have to be included in your assessable income (as a general rule, the costs incurred by providing fringe benefits are income tax deductible).

An employee contribution doesn't reduce the cost price of the car.

In relation to your circumstances, you have self-assessed the employee contributions have reduced the FBT to nil for the company.