Deductibility of rents and utility expenses by employee on premises owned and used by employer

Is a taxpayer who rented an employer owned cottage as a place of residence, entitled to claim deductions for rent and operating costs of the cottage under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997), where the rental agreement permitted the employer to concurrently use the premises for business purposes?

No. The taxpayer who rented an employer owned cottage is not able to claim deductions for rent and operating costs under section 8-1 of the ITAA 1997, where the rental agreement permitted the employer to concurrently use the cottage for business purposes as they were not incurred in gaining or producing assessable income.

The taxpayer entered into a rental agreement for a cottage owned by their employer. The terms of the rental agreement were: • the taxpayer will have the use of the cottage as a private dwelling; • the taxpayer agreed to allow the cottage to be used occasionally by the employer as an office, amenities area and meeting place; • the rent for the cottage to be deducted from the taxpayer's wages; • the taxpayer pays utility costs (e.g., electricity, water, etc) on the cottage; • the taxpayer to vacate the cottage after termination of employment; and • the taxpayer maintains the cottage in good working order.

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 assessable income except where the outgoings are of a capital, private or domestic nature.

The courts have considered the meaning of 'incurred in gaining or producing assessable income'. In Ronpibon Tin NL Kah Compound NL v. Federal Commissioner of Taxation (1949) 78 CLR 47; 56 ALR 758; 8 ATD 431 the High Court stated that: 'For expenditure to form an allowable deduction as outgoing incurred in gaining or producing the assessable income it must be incidental and relevant to that end. The words "incurred in gaining or producing the assessable income" mean in the course of gaining or producing such income.'

The expenditure must therefore be related to the production of assessable income of the employee. The use of the employer's owned premises for both private, ie. taxpayer's accommodation, and business purposes by the employer was: • part of the taxpayer's employment package; and • did not produce assessable income for the taxpayer.

Accordingly, the cost of rent and operating costs of the cottage are not deductible under section 8-1 of the ITAA 1997 as they were not incurred in the course of gaining or producing assessable income.