Edited version of private advice

Authorisation Number: 1052113265397

Date of advice: 15 May 2023

Ruling

Subject: Deductibility of expenses

Question

Is a deduction allowed under section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997) for the costs incurred for the waterproofing and tiling of the bathroom at your residential premises?

Answer

No.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You are a discretionary trust conducting pharmacy services.

X Pty Ltd is the trustee.

X is the director of the corporate trustee and a beneficiary of the trust.

X is a Locum Pharmacist who provides their services to pharmacies. During the 20XX financial year, X worked in two pharmacies.

You contract X's professional services with various pharmacies for daily rates and issue invoices to the pharmacies for the services provided by X.

X receives salary and trust distribution from you depending on the profit at the end of the financial year.

X has a study room at their home at X where X undertakes administrative tasks relating to their work as a pharmacist, including:

•         Wage payments

•         Rostering emails

•         Medication management reviews and report

•         Education modules

There is no signage at the premises to indicate your business.

It is estimated that X spends upwards of X hours a night of work at their home to remain current with their work.

You incurred expenses for the waterproofing and tiling work carried out in the bathroom at X's home.

As a frontline health care worker, X uses the bathroom for showering to prevent COVID transmission whilst moving between facilities.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 section 25-10

Reasons for decision

Question

Is a deduction allowed under section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997) for the costs incurred for the waterproofing and tiling of the bathroom at your residential premises?

Summary

The costs incurred for the waterproofing and tiling for the bathroom are not deductible under section 25-10 of the ITAA 1997 as they were repairs in respect of a main residence where the only income producing activities are associated with a private study.

Detailed reasoning

Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing your assessable income or are necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income, except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income.

Section 25-10 of the ITAA 1997 allows a deduction for non-capital expenditure on repairs to premises, or part of premises, held or used by the taxpayer for the purpose of producing assessable 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,

•         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).

Home office running and occupancy expenses

The Commissioner's view about the deductions allowable for home office expenses is in Taxation Ruling TR 93/30 Income Tax: deductions for home office expenses.

As a general rule, 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 home is used for income producing activities and has the character of a place of business.

Another exception to this general rule is where part of the home is used in connection with the taxpayer's income earning activities but does not constitute a place of business. In this case, a more limited range of deductions may be available.

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.

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, or

•         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 ascertaining the character of an area used as a home office. Rather the decision in each case will depend on whether, on a balanced consideration of:

•         the essential character of the area

•         the nature of the taxpayer's business, and

•         any other relevant factors.

the area constitutes a 'place of business' in the ordinary and the area constitutes a place of business in the ordinary and common sense meaning of that term.

The deductible expenses in respect of a home office can be divided into two broad categories:

•         Occupancy expenses - expenses relating to ownership or use of a home which are not affected by a taxpayer's income earning activities. These include rent, mortgage interest, municipal and water rates, land taxes and house insurance premiums.

•         Running expenses - expenses relating to the use of facilities within the home. These include electricity charges for heating/cooling, lighting, cleaning costs, depreciation, leasing charges and the cost of repairs on items of furniture and furnishings in the office.

If an area of the home has the character of a place of business, some part of the expenses from both categories may be claimed as a deduction. In most cases the apportionment of expenses should be made on a floor area and, in addition, where the area of the home is a place of business for part of the year, a time basis. However, where an area of the home is simply used in connection with income producing activities but does not have the character of a place of business, only expenses in the latter category (the running expenses) are allowable. The amounts allowable as deductions are the additional expenses incurred as a result of income producing activities.

Application to your circumstances

The income of the trust is derived from the services provided by X to different pharmacies as a locum pharmacist. This means that X's work is mainly conducted at the premises of your clients. Due to the nature of X's work, it cannot be said that the business activity is being conducted at X's residence. The activities undertaken by X are clearly distinguishable from situations such as a hairdresser with a home salon, a doctor with a home surgery or a tradesperson with a home workshop where income producing activities are being undertaken at home.

X uses the study room and spends around three hours a night to undertake administrative tasks. Whilst the study room is used in connection with the income-producing activities, it retains its private or domestic character as it is suitable or adaptable for use for private or domestic purposes in association with the home. Hence, the study room area of X's residence does not have the character of a place of business.

Whilst the study room does not have the essential character of a place of business, you may be entitled to a deduction for the portion of running expenses that relate to your home office where you establish that you have incurred additional expenditure on the running expenses as a result of their income producing activities.

Running expenses may include:

•         Electricity or gas (energy expenses) for heating or cooling and lighting

•         Home and mobile internet or data expenses

•         Mobile expenses and home phone expenses

•         Stationery and office expenses

•         The decline in value of depreciating assets you use for work - for example

­   Office furniture such as chairs and desks

­   Equipment such as computers, laptops and software.

•         The repairs and maintenance to depreciating assets.

The bathroom is not part of the study room where the income-producing activity is conducted and is not used for the purpose of producing assessable income. The expenses incurred in connection with the waterproofing and tiling of the bathroom is considered private in nature. Therefore, no deductions are allowed under section 25-10 of the ITAA 1997.

Further information about claiming deductions for running expenses for an area of a home that is used in connection with income earning activities, including how to calculate your claim, is available here or search for 'QC 33864' on ato.gov.au