Edited version of private advice

Authorisation Number: 1052199094409

Date of advice: 30 November 2023

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.

Question 2

Are you entitled to claim a deduction for the cost of building a new wall and door for your home office?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June CCYY

Year ended 30 June CCYY

The scheme commences on:

XX/MM/YYCC

Relevant facts and circumstances

You are employed by a Company in a full time position.

Your date of service with the Company started on XX/MM/YYCC. You worked in Country A and Country B before starting your contract in Australia on XX/MM/YYCC. You have lived in City A since relocating to Australia.

The Company's Australian office is in City B, State B, they do not have an office in City A, State A.

The Company have XX clients in Australia and you personally support X City B clients, X City A clients and X Country B clients. There are a total of X clients in City A. You also manage a team of employees.

Your employer requires you to work exclusively from home.

Your home office has a dedicated floorspace that you arranged for a builder to put up a wall and door to enclose it.

Your home office contains a desk, computer screens, printers and other office equipment.

Your home office is used for approximately 40-60 hours per week for work and has no other use, it is used for work 100% of the time.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 division 43

Detailed reasoning

Question 1

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 home office 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 home office 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 occupancy 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

The building of a wall to create your home office 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.