Edited version of private advice

Authorisation Number: 1052287651550

Date of advice: 21 August 2024

Ruling

Subject: Deductions

Question

Is the outgoing incurred in acquiring a caravan that will be used as the home office for employees deductible under section 8-1 of the Income Tax Assessment Act 1997?

Answer

No

This ruling applies for the following period:

DD MM YYYY

The scheme commenced on:

DD MM YYYY

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect, and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

Background information

•                     XXXX (company) provides digital consultant services for organisations in Australia.

•                     The company commenced trading in the income year ended DD MM YYYY.

•                     The company has two employees consisting of an employee director and their spouse who is employed as an office administrator.

•                     The employee director's work is conducted remotely with meetings held online and is occasionally required to visit customers in the provision of their services and train staff.

•                     The company was a small business entity in the income year ended DD MM YYYY.

•                     The company has previously used the instant asset write-off provision under the simplified depreciation rules.

The caravan

•                     The employee director purchased a caravan in MM YYYY for $XXXX (caravan). The caravan is registered in the name of the employee director. It was used for recreational purposes.

•                     The caravan is 7 metres long by 2.4 metres wide and can accommodate 6 people.

•                     Upgrades of approximately $XXXX were made to the caravan after its acquisition, which involved installing an off-grid solar battery system, replacing the kitchen and fridge, and resealing windows and repainting the exterior to ensure weather tightness.

•                     As a result, the caravan is capable of operating from an off-grid solar battery system comprising solar panels, battery bank and power inverter.

•                     The caravan has built-in kitchen cabinets, a fridge and freezer, built-in storage and built-in beds.

•                     The home office consists of an office desk and chair, computer monitor, Apple Mac computers and printer.

•                     Desk space in the caravan will be possible by folding the main bed into the wall to allow a large workspace.

•                     The employee director will be using the caravan as their home office for 16-22 hours per week for work and solely for work purposes.

The arrangement

•                     The employee director moved to a new residence with no suitable home office business space on DD MM YYYY.

•                     The company purchased the caravan from the employee director on DD MM YYYY for $XXXX. The caravan has since been used as a base for the company's employees to work from.

•                     The caravan will be deregistered as a vehicle.

•                     The current market value of the caravan is estimated to be $XXXX based on research of caravans that are being sold of a similar age and features.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Further issues for you to consider

We have limited our private ruling to the questions raised in your application. There may be related issues that you should consider, including the application of the simplified depreciation rules. We note that as the company was a small business entity in the income year ended DD MM YYYY and has previously used the simplified depreciation rules, the company may be entitled to claim an immediate deduction for the cost of the caravan under the instant asset write-off provision.

We have provided general guidance in a separate letter to help you understand how the law applies in relation to the simplified depreciation rules.

You may apply for another private ruling on this or any other matter.

Reasons for decision

All legislative references are to the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise stated.

Question:

Is the outgoing incurred in acquiring a caravan that will be used as the home office for employees deductible under section 8-1 of the Income Tax Assessment Act 1997?

Summary:

The outgoing incurred by the company in acquiring the caravan is not deductible because it is capital in nature and the company is precluded from claiming a deduction under paragraph 8-1(2)(a).

Detailed Reasoning

Allowable deductions

•                     A loss or outgoing can be deducted from a taxpayer's assessable income under subsection 8-1(1) to the extent that:

-              it is incurred in gaining or producing your assessable income; or

-              it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income.

•                     However, subsection 8-1(2) denies a deduction for a loss or outgoing to the extent that:

-              it is a loss or outgoing of capital, or of a capital nature; or

-              it is a loss or outgoing of a private or domestic nature; or

-              it is incurred in relation to gaining or producing your exempt income or your non-assessable non-exempt income; or

-              a provision of this Act prevents you from deducting it.

•                     The first exclusion in paragraph 8-1(2)(a) prevents an amount from being deducted if it is capital or of a capital nature.

•                     The expressions 'capital' or 'capital nature' are not defined terms. Whether expenditure is capital or revenue in nature depends on the facts of each case. The character of the advantage sought provides important direction. It provides the best guidance as to the nature of the expenditure as it says most about the essential character of the expenditure itself. The nature or character of the expenses follows the advantage that is sought to be gained by incurring the expenses. If the advantage to be gained is of a capital nature, then the expenses incurred in gaining the advantage will also be of a capital nature.[1]

Application to your circumstances

•                     The company does not provide its employees with a place to work from, so employees are required to work from home. It is the company's intention to use the caravan exclusively as the company's sole base of operations for income producing activities. The caravan will allow the employee director a place to work on their computer, attend meetings online, and liaise with customers over email and telephone. Similarly, their spouse can conduct their responsibilities as a bookkeeper and undertake office administration.

Deductibility of the caravan

•                     On DD MM YYYY, the company acquired a caravan from the employee director. The caravan has been deregistered as a vehicle and is used exclusively as a home office as the employees have moved to a new residential property with insufficient home office space.

•                     It is considered that the expenditure to acquire the caravan is an expense which meets the conditions in paragraph 8-1(1)(b), as it can be said to be necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income. However, as the payment of $XXXX to acquire the caravan is an outlay by the company to provide a space for its employees to work, it is also considered to be an expense that is capital in nature. The purchase will provide an enduring benefit to the company's business by offering its employees with a place to work from.

•                     As such, it is considered that the outgoing incurred by the company on the caravan of $XXXX is capital, or of a capital nature. The outgoing is not deductible to the company under paragraph 8-1(2)(a).

•                     The cost of the caravan may still be allowable as a specific deduction in section 8-5 under the depreciation rules notwithstanding that the cost of the caravan is not allowable as a general deduction under section 8-1.

[1] Sun Newspapers Ltd and Associated Newspapers Ltd v. Federal Commissioner of Taxation (1938) 61 CLR 337.