Edited version of private advice

Authorisation Number: 1051978945613

Date of advice: 13 May 2022

Ruling

Subject: Home office expenses

Question 1

Are you entitled to claim a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for the portion of your occupancy expenses relating to your home office?

Answer

Yes.

The deductibility of occupancy expenses and methods for apportioning those expenses are addressed in Taxation Ruling TR 93/30 Income tax: deductions for home office expenses.

Generally, expenses associated with a taxpayer's home are of a private or domestic nature and do not qualify as deductions for taxation purposes. An exception to this general rule is where part of the taxpayer's home is used as their sole base of operations for their income producing activities ("place of business"), for example, where no other work location is provided to an employee by their employer.

For a taxpayer to show that part of their home is a place of business they need to be able to show that:

•                    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 this case, your shed has the character of a place of business. It is necessary for you to work from home because your employer does not provide you with an alternative place to work from and the shed is used exclusively as your sole base of operations for income producing activities.

As an area of your home has the character of a place of business, the work-related portion of the occupancy expenses incurred is an allowable deduction under section 8-1 of the ITAA 1997.

Deductible occupancy expenses include rent, mortgage interest, municipal and water rates, land taxes and house insurance premiums.

However, as the home is used for both income producing and private purposes, the occupancy expenses need to be apportioned. The deductible proportion of the rental expense should be calculated as a percentage of floor space of the room directly used for performing employment duties compared to that of the entire dwelling.

There are also CGT implications for using an area of your main residence for income producing purposes.

Question 2

Are you entitled to claim a deduction for the cost of an electrical fit out and internet connections for your home office?

Answer

Yes.

The electrical fit out and connection of internet would be considered capital works.

Division 43 of the ITAA 1997 provides for a system of deducting capital expenditure incurred in the construction of buildings and other capital works used to produce assessable income.

You can deduct construction costs for the following capital works:

•                    buildings or extensions, alterations or improvements to a building begun in Australia after 21 August 1979

•                    structural improvements or extensions, alterations or improvements to structural improvements begun after 26 February1992

Deductions for construction costs must be based on actual costs incurred.

Section 43-210 of the ITAA 1997 covers how to calculate deductions for capital works which began after 26 February 1992.

Your entitlement to a deduction must be worked out having regard to the date the building was first used to produce assessable income after construction is completed. The first and last years of use may be apportioned.

This ruling applies for the following period:

Year ended 30 June 2021

The scheme commences on:

1 July 2020

Relevant facts and circumstances

You are employed by a company to design and create a product.

You work exclusively from home utilising a home office and workspace in an exclusive area of your shed which can be apportioned on floor space.

The shed is detached from the main house with its own separate driveway and entrance for customers with visible business name signs.

The facilities you use to conduct your work are not available at your employer's office.

Your employer does not provide any alternative work location.

Your employer requires you to work from home and make modifications to your shed including power and internet connection along with the construction of an upper floor for the home office area to be accommodated.

Clients visit your shed for pick up, demonstrations and sales of the product.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Division 43