Edited version of private advice

Authorisation Number: 1051661009366

Date of advice: 17 April 2020

Ruling

Subject: Business expenses - guard dog

Question

Are you entitled to a deduction for a portion of the ongoing maintenance costs of your dog to the extent that it is used for business purposes and provided the expenses are not considered to be capital in nature?

Answer

Yes. We consider 10% to be a reasonable portion.

This ruling applies for the following period:

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The Trust operates a business (the Business).

The Business operates from a residential property (the Property).

The Property is also the residential address of the trustee and owner of the business (You) and your spouse.

The Business stores stock and equipment at the Property.

The equipment is stored in the garage (which has internal access to the house) and along one side of the Property between the house and the side fence.

Your work truck is stored in the driveway of the Property overnight.

The Business experienced a theft, despite having security cameras installed.

You felt it was necessary to add further measures to help protect your stock and equipment stored at the Property.

You personally purchased a puppy which, once grown and trained, will act as a guard dog.

The breeder advised that the dog will be there as a deterrent but will attack if need be.

The dog is living at the Property now as he grows, being confined to the downstairs area

He will attend obedience training and will then receive specific guard dog training.

He will not be ready for guard dog duties for several months.

You chose to purchase a puppy as opposed to a fully grown, trained guard dog, as you want the dog to associate you as being the alpha male in the relationship.

He will be socialised with the residents of the house, being you and your spouse, to ensure he can recognise threats and prevent unnecessary attack. He will not be treated as a pet.

The Business will pay for the ongoing costs associated with the maintenance of the dog.

During the day the dog has access to the lower level (ground floor) of the two storey home on the Property.

Each night when you are home, the dog will be confined to the 5 metre x 5 metre garage.

Approximately 10% of the house is dedicated to sole business use.

The dog's role is to be a guard dog at all times.

Other people will at times need to feed and walk the dog.

Relevant legislative provisions

Income Tax Assessment Act 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 except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income.

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).

A dog is inherently considered a pet and therefore, expenses incurred in maintaining a dog are generally a private or domestic expense.

However, in some instances a dog is considered a working beast or item of plant for a business, for example:

·         a guard dog which used to provide security for business premises as it is serving a productive function of the business,

·         a working dog is used to muster stock is also serving a productive function or

·         a police dog which is used to search, protect and detain serves a productive function.

A working beast such as a guard, working or police dog remain on the business premises and do not socialise with owners. These dogs are relevant to the operation of the business and maintenance expenses would generally be deductible under section 8-1 of ITAA 1997.

Where the expense provides both a business function and a private function it is necessary to apportion the expense. As it is often a question of fact and degree as to the portion of business and private use, the method of apportionment must be fair and reasonable in all the circumstances.

In reaching our decision in your case, we have considered the cumulative effect of the facts presented.

Whilst it is acknowledged that your dog was purchased with the intent of taking on the role of guarding the stock at the Property once fully grown and trained, it also protects your residence and personal belongings and has opportunity for social interaction with the family. This is the case due to the nature of the Property.

It is difficult to distinguish between the private and business functions of some areas of the Property as the rooms provide a dual purpose.

As such it will be necessary for you to apportion the maintenance expenses between the business function provided by the dog and the private function provided by the dog.

The actual apportionment of the expenses must be based on the facts of the case and there must be some fair and reasonable assessment of the extent to which the outlay relates to the assessable income.

We accept that approximately 10% of the home is dedicated solely to business use.

Therefore, you are entitled to claim a deduction for 10% of the total costs for the maintenance associated with the dog, being the amount that relates to the business function and the earning of assessable income, provided that the expenses are not considered to be capital in nature.