1 Is the Company entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) in relation to the rental expenses for the area it uses in the Unit?
Yes. This ruling applies for the following period : Year Ending 30 June 20XX The scheme commences on: July 20XX
The Company operates a consulting business (the Business). The Business commenced in November 20XX. The Company's sole director and shareholder is the Individual. The Individual is the sole consultant at the Business. The Individual owns the Unit. It is their place of residence. The Unit has X bedrooms. X bedrooms are used by the Individual for personal use. The remaining bedroom (the Remaining Bedroom) is used by the Company for the Business. This bedroom has been used for this purpose since the Business' commencement. The Unit also has additional areas. This includes a garage. A wall was constructed through the garage, dividing it into multiple areas. One area remains to be used as garage space. The other area (the Garage Back) was set aside to be used by the Company for the Business. The Garage Back is adjacent to the Remaining Bedroom. A door was constructed in the wall between these areas, creating an expanded office space (the Expanded Office Space). Carpentry would be required to reinstate the wall to its original form. These developments were completed in February 20XX.
The entire expanded office space is now used by the Company to operate the Business upon completion of the developments. The Expanded Office Space contains a desk, computer and sofa. Most of the Business' files are stored electronically, so the Expanded Office Space does not contain any physical storage. The Expanded Office Space is used exclusively by the Company to operate the Business. The rest of the Unit is used exclusively by the Individual for personal use, despite additional areas in the Unit which may be used incidentally for the Business. In particular, the Business' clients are greeted in the kitchen before they are taken into the Expanded Office Space for consulting. Also, another door connects the Expanded Office Space to the backyard. A gate has been constructed within the fence to the backyard, enabling further client access to the Expanded Office Space from outside. At the front of the Unit, there is an A-frame sign for the Business. There is also a banner. When searched on Google, the Business appears with its address. Its presence on this search engine assists with attracting clients.
The Business engages with clients at the Unit as per the clients' request. Since the COVID-19 pandemic, clients have been more inclined to request to be engaged virtually. As some clients are remote from the Unit, these clients are engaged with at commercial workspace hubs. The Company will pay rent to the Individual to use the Expanded Office Space from the 20XX-XX financial year. There is a tenancy agreement which was made in February 20XX. This affirms: • the Unit is the premises let by the rental provider, • the Individual is the rental provider, and • the Company is the renter. The agreement begins in July 20XX and ends in June 20XX. The agreement stipulates a rental amount of $X per calendar month, with the first rent payment due in July 20XX.
Income Tax Assessment Act 1997 section 8-1
Occupancy expenses The expenses in respect of a home office include occupancy expenses. These expenses relate to ownership or use of a home which are not affected by the taxpayer's income earning activities. These expenses can be incurred even if the taxpayer is not carrying on a home-based business. These expenses include: • rent, • mortgage interest, • municipal and water rates, • land taxes, and • house insurance premiums. For a deduction to be allowable for home occupancy expenses, the expenses must satisfy the requirements of section 8-1 of the ITAA 1997. General deductions Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent to which they are incurred in: a) gaining or producing assessable income, or b) carrying on a business to gain or produce assessable income. This is except where the losses or outgoings: a) are capital or capital in nature, b) are private or domestic in nature, c) relate to the earning of exempt income, or
d) are prevented from being deducted by a provision. A deduction is only allowable if an expense: • is actually incurred, • meets the deductibility tests, and • satisfies the substantiation rules. Home-based business expenses Generally, expenses associated with a taxpayer's home are private or domestic in nature and therefore do not qualify as allowable deductions for taxation purposes. Despite this, Taxation Ruling TR 93/30 Income tax: deductions for home office expenses (TR 93/30) provides the Commissioner's view on deductions allowable for home office expenses. It provides expenses are deductible where part of the home is used for income producing activities and has the character of a place of business. Therefore, it must be satisfied the area the taxpayer uses is a place of business before it can claim occupancy expenses as a deduction.
Whether an area of the home has the character of a place of business is a question of fact which depends on the circumstances of each case. An example is where part of the home is used as a taxpayer's sole base of operations for income producing activities (e.g., where no other work location is provided to an employee by an employer). TR 93/30 outlines the following factors the Commissioner uses to indicate whether a home office 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 income producing purposes, and • 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 determining whether the home constitutes a place of business in the ordinary and common sense in the meaning of the term. The determination will depend on a balanced consideration of the essential character of the area, the nature of the taxpayer's business and any other relevant factors. Home-based business operated through a company or trust Where a home-based business is conducted by an individual through a company or trust, as the company or trust is separate from the individual who owns or occupies the dwelling, there must be a genuine, market-rate rental contract (or similar agreement) when claiming home-based business expenses. It must be identified which expenses the company or trust is liable for and may deduct, ensuring the outgoings are incurred while carrying on the business and not private in nature.
It must be assured the relevant area has the character of a place of business to the company or trust and the expenses are incurred for the company or trust's income producing purposes. It must be demonstrated the company or trust, rather than the individual, is using the space to carry on income-earning activities. Application to your circumstances In this situation, the Individual operates a consulting business through the Company from their dwelling. The Business is operated in an area in the dwelling which cannot be easily converted to be suitable for personal use. The Business uses additional areas in the Unit incidentally; however, the main business operations are carried out in the Expanded Office Space On a balanced consideration of the facts surrounding the Company's circumstances, we consider the Expanded Office Space constitutes a place of business. The Company has a formal rental agreement with the Individual to rent the area it uses in the Unit for $X per month. Therefore, as the Expanded Office Space is considered a place of business and there is a formal rental agreement, the Company is entitled to the rent expense it incurs.