Edited version of private advice

Authorisation Number: 1051949982464

Date of advice: 16 February 2022

Ruling

Subject: Home office deduction - rent

Question

Are you entitled to a deduction for the rent of the unit used to carry out your work duties?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You work for an employer.

Your usual workplace is in a capital city.

During the 20XX income year the state government were contemplating Covid restrictions.

In anticipation of these restrictions, you rented a residential unit out of the city to use as an office to carry out your work duties.

You connected the electricity and set up Wi-Fi capability at the unit.

The rent on this unit was $XXX per week and was cheaper than renting commercial space.

You also offered this unit to your employer for any staff who lived nearby who were unable to travel to the capital city (where your employer is based) if that capital city went into a lockdown situation and movement of people was possibly restricted.

You were the only one who used the unit to work from for the period you rented it.

The unit was only used for work purposes and there was no private use.

You rented this premises for a number of weeks and when it became clear the restrictions were not going to happen you ceased renting the premises.

You were not able to work from your home due to insufficient space.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Reasons for decision

A taxpayer is entitled to an allowable deduction under Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997), if the loss or outgoing is incurred in producing your assessable income except where the outgoing is of a capital, private or domestic nature.

The term 'incurred in gaining or producing assessable income' means incurred 'in the course of gaining or producing assessable income'.

For an expense to be incurred in gaining or producing assessable income it is both sufficient and necessary that the occasion of the expense should be found in whatever is productive of assessable income.

Paragraphs 13 to 15 of TR 2020/1 Income tax: employees: deductions for work expenses under section 8-1 of the Income Tax Assessment Act 1997 state:

13. The pivotal element of section 8-1 for work expenses is the requirement that expenses be incurred 'in gaining or producing assessable income'. The High Court majority in Payne said it is well established that these words are to be understood as meaning incurred 'in the course of' gaining or producing assessable income, and do not convey the meaning of outgoings incurred 'in connection with' or 'for the purpose' of deriving assessable income.

14. The majority further stated that the meaning of 'in the course of' gaining or producing income was amplified in Ronpibon Tin NL where it was held that:

... to come within the initial part of [section 8-1] it is both sufficient and necessary that the occasion of the loss or outgoing should be found in whatever is productive of the assessable income, or if none be produced, would be expected to produce assessable income...

15. While the High Court authority indicates the nature of the connection that needs to be found between outgoings and assessable income, the sufficiency of the connection in a given case cannot simply be determined by reference to a precise formula. Section 8-1 is expressed in such terms that it is intended to cover any number of legal and factual situations. In many cases, only a proper consideration of all the relevant facts and circumstances will reveal whether the occasion of a particular outgoing is to be found in what produces assessable income.

TR 93/30 Income tax: deductions for home office expenses considers the deductibility of occupancy and running expenses incurred by taxpayers who work from home.

Generally, expenses associated with the ownership and use of a home, such as rent, are private or domestic in nature. An exception to this is where part of the home is used for income producing activities and has the character of a 'place of business'. Whether an area of a home has the character of a 'place of business' is a question of fact and depends on the particular circumstances of the case. In the case of an employee, this is likely to be the case where the home is used as the sole base of operations for their income producing activities, that is where no other work location is provided to the employee by an employer.

It is the absence of an alternative place for conducting the income producing activities that has influenced the decision to treat part of an employee's home as the sole base of operations for their income producing activities. In those circumstances, a place of business/sole base of operations will exist only if:

•         it is a requirement inherent in the nature of the employee's activities that the taxpayer needs a place of business

•         the employee's circumstances are such that there is no alternative place of business and it was necessary to work from home, and

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

While it was necessary for employees who were locked down due to the covid pandemic to work from home, employees in that situation can be contrasted to the taxpayer in Swinford v FCT 84 ATC 4803, Case F53 74 ATC 294 and Case T48 86 ATC 389 (cases where occupancy expense have been allowed). In those cases, the taxpayers' home was the only place they could carry out their income producing activities.

In your case you rented a unit to use as office space in anticipation of a State Government Health Order causing restrictions coming into force. You contend that you were not able to work from home and you rented this space to work out of, however, the anticipated restrictions did not come into force and you ceased renting the unit after a number of weeks.

You were not prevented from working from your employer's office during those weeks you rented the unit and had your employer's office available. You employer has provided you with a work location and your employer has not prevented you from attending that location.

Therefore, the unit was not your sole base of operation or a place of business.

The $XXX per week cost of renting the unit is not an allowable deduction under section 8-1 of the ITAA 1997.