Home Office Costs - are the incurred in gaining income?
taxpayer does not have a separate place
of business
What the Commissioner says – 26 cents
per hour should cover it
The high court has ruled on the question
of the provision of a home office in the Forsyth and Handley cases-par 14-480
CCH Master Tax Guide
In short, outgoings, which relate
to the provision of a home for the taxpayer, will not be incurred in gaining
income. These will include rent, mortgage interest,
rates & taxes and insurance.
However, where an outgoing can
be shown to relate exclusively to the taxpayer's use of the home office for
production of income, then a deduction may be warranted.
The most obvious example is the proportion of the total bill for light and
heating attributable to the exclusive use by the taxpayer of the home office in
the course of activities, which give rise to income.
Refer CCH Master Tax Guide paragraph
14-480. While no single one of the listed factors was decisive, they were
relevant to the final outcome of the case, in which the court disallowed a
deduction for the rent attributable to the office.
However ... If a taxpayer does not have a separate place of business and the office was not integrated into the
domestic establishment, then a case might be made for deduction of rent or
mortgage interest, etc. Example would include…
A doctor's surgery,
A caterer's kitchen,
An author's study.
The office
remained part of his home
This would relate to the activities
carried on in the office.
The connection between the expenditure
and the teaching income is too remote, but with a little work, it may be
possible to demonstrate that the teacher could qualify for a deduction. For
example, if a language teacher spent twelve months overseas in the country
where the language he teaches is spoken, it is possible that the connection
between the expenditure and the gaining of income could be demonstrated..
The effect on income would be too far in
the future for the expenditure to be incurred in gaining income.
The connection is too remote.
What the Commissioner says – 26 cents per hour
should cover it
PS LA 2001/6
FOI status:
may be released
This Practice Statement is issued under the authority of the Commissioner
and must be read in conjunction with Law Administration Practice Statement PS LA 1998/1 . It must be followed by ATO
officers unless doing so creates unintended consequences. Where this occurs ATO
officers must follow their Business Line's escalation process.
ATO Practice Statement Law Administration
|
SUBJECT: |
Home
Office Expenses; diaries of use and calculation of home office expenses |
STATEMENT
1. Where individual taxpayers keep a diary for the purpose of establishing a
connection between the use of their home office and their work or business, the
Commissioner will accept diary records covering a representative four week
period as establishing a pattern of use for the entire year.
2. Individual taxpayers who claim deductions for work or business related
home office running expenses comprising electricity, gas and decline in value
of office furniture may claim either a deduction for the actual expenses
incurred or a deduction calculated at the rate of 26 cents per hour. A
deduction is allowable only where additional running costs are incurred by a
taxpayer because of income producing activities. For example, if a taxpayer
undertakes a work activity in a room where other family members are watching
television, there may be no additional cost occasioned by that work activity.
Also, the income producing use of the home office needs to be substantial and
not merely incidental. For example, a deduction would not be allowed at the
rate of 26 cents per hour for the home office simply because a facsimile
machine is left on 24 hours a day 7 days a week to receive business documents.
3. Other home office expenses, such as telephone expenses and decline in value
of computers or other equipment, will have to be calculated separately.
4. Telephone expenses
(a)
Home office telephone rental expenses may be partly
deductible for taxpayers who are either 'on call' or required to contact their
employer or clients on a regular basis. TR 98/14 states that the deductible
portion of telephone rental expenses can be calculated using the formula:
Business calls (incoming and outgoing) / Total calls
(incoming and outgoing)
(b)
A deduction is allowable for the cost of telephone calls
made in the course of work or business. Work or business calls may be
identified from an itemised telephone account. If such an account is not
provided, records covering a representative four week period will be accepted
as establishing a pattern of use for the entire year for the purpose of making
a reasonable estimate of the portion of call expenses for work or business.
5. Decline in value of Computers or other equipment
If home office equipment, such as a computer, printer, photocopier etc., is
used only partly for work or business purposes, then the decline in value
deduction is reduced by an amount that reasonably reflects the extent that
equipment was not used for income producing purposes. Taxation Ruling TR 93/30
states that the amount of decline in value claimed as a deduction should be
based on an bona fide estimate of the percentage of income producing
use. The Commissioner will accept an estimate of the extent of income producing
use where it is based on a diary record of the income related and non-income
related use of that equipment covering a representative four week period. Such
a diary record would need to show the nature of each use of the equipment,
whether that use was for an income producing or non-income producing purpose
and the period of time for which it was used.
EXPLANATION
Records of Home Office Use
6. Individual taxpayers who claim home office expenses are required to be
able to prove that they have incurred such expenses. Such taxpayers must also
be able to establish a connection between the use of their home office and
their work or business. The Commissioner's view of the law relating to home
office expenses is contained in Taxation Ruling TR 93/30 - Deductions for home
office expenses.
7. Normally, a taxpayer would have to keep a complete diary recording the
duration and purpose of each use of their home office during the year in order
to demonstrate this connection for every occasion. However, this imposes an
unreasonably high compliance cost upon taxpayers in relation to what are
frequently small claims.
8. In order to ease this evidentiary burden, the Commissioner will accept a
diary covering a representative four week period as establishing a pattern of
use for the entire year. The taxpayer may then use this pattern of home office
use to calculate the home office running expenses claim for the entire year,
allowing for periods when the home office is not used for income production,
such as holidays, illnesses, etc. This method is outlined in Tax Pack.
9. A new diary must be kept for each financial year, as patterns of use are
likely to fluctuate over two or more years. Employees must keep each of these
diaries for five years after lodgment of the return for that year or the due
date for that lodgment, whichever is later, in accordance with section 900-25
of the Income Tax Assessment Act 1997.
10. A small number of taxpayers incurring home office expenses may not have
a regular pattern of home office use upon which a representative pattern may be
based. Such taxpayers will need to keep records of the duration and purpose of
each use of their home office during the year.
Calculation of Home Office Running Expenses
11. Based upon actual use or an established pattern of use, the Commissioner
will accept that a taxpayer has incurred 26 cents per hour for home office
running expenses for heating, cooling, lighting and decline in value of
furniture (desks, tables, chairs, cabinets and shelves). This rate is based
upon average energy costs and the value of common furniture items used in home
offices. However, due to larger variations in cost of computers, telephones,
photocopiers, etc, the taxpayer will still have to calculate decline in value
of other items in the home office separately.
12. Naturally, taxpayers who wish to use the actual costs method to claim a
deduction for these home office running expenses can do so, but they will need
to keep appropriate records to be able to show the amounts of the expenses
incurred and the extent to which they are incurred in deriving assessable
income.
13. By accepting this simpler and easier method of calculating the small
amounts of home office running expenses, the Commissioner is again attempting
to decrease the cost of compliance for individual taxpayers.
Examples
14. The following are examples applying this approach to typical taxpayer
situations.
Example 1
Betty is an employee accountant working for a city-based firm that expects her
to complete a specified amount of work each day. In order to achieve this,
Betty has elected to take some of her work home at night so that she can spend
more time with her family. Betty spends an average of two hours per night
Monday to Friday working in her home office.
Betty has two options for calculating her running expenses, both of which
require her to keep a log to apportion between income producing activities and
private/domestic use, aside from decline in value of her computer equipment
(which is common to both scenarios but separately calculated):
Option 1 (Actual Running Expenses)
Betty has the following home office running expenses, including energy
expenses which have been calculated using electricity authority hourly costs
per appliance. The apportionment has been based on four weeks' diary entries as
follows:
|
Item |
Calculation |
Deduction
Amount - This year |
Deduction
Amount - Future years (assuming similar use) |
|
Decline
in value of Desk |
Value
$350 over 10 years |
$35.00 |
$35.00 |
|
Decline
in value of Chair |
Value
$200 over 1 year |
$200.00 |
$NIL |
|
Electricity
for 60W Ceiling Light |
0.7c per
hour for ten hours per week for 48 weeks |
$3.36 |
$3.36 |
|
Electricity
for Computer |
1c per
hour for ten hours per week for 48 weeks |
$4.80 |
$4.80 |
|
Electricity
for Heating/Cooling |
9c per
hour for ten hours per week for 48 weeks |
$43.20 |
$43.20 |
|
Total
Deductible Amount
|
|
$286.36 |
$86.36 |
Option 2 (Estimated Running Expenses)
Betty is able to use a simpler and quicker calculation for her expenses:
|
Item |
Calculation |
Deduction
Amount - This year |
Deduction
Amount - Future Years (assuming similar use) |
|
Running
Expenses |
26c per
hour for ten hours per week for 48 weeks |
$124.80 |
$124.80 |
While Option 1 gives a greater deduction this year because of the immediate
write-off of a chair costing less than $300, Option 2 will allow greater
ongoing deductions with a simpler calculation, assuming future use and
electricity costs remain similar.
Example 2
Felix is a computer programmer with BMI Corp. Felix telecommutes to the BMI
site in Silicon Valley USA for fifteen hours each week.
Option 1 (Actual Running Expenses)
Felix has the following home office running expenses, including energy
expenses which have been calculated using electricity authority hourly costs
per appliance. The apportionment has been based on four weeks' diary entries as
follows:
|
Item |
Calculation |
Deduction
Amount - This year |
Deduction
Amount - Future years (assuming similar use) |
|
Decline
in value of Desk |
Value
$350 over 10 years |
$35.00 |
$35.00 |
|
Decline
in value of Chair |
Value
$200 over 1 year |
$200.00 |
$NIL |
|
Electricity
for 100W Lamp |
1c per
hour for fifteen hours per week for 48 weeks |
$7.20 |
$7.20 |
|
Electricity
for 60W Ceiling Light |
0.7c per
hour for fifteen hours per week for 48 weeks |
$5.04 |
$5.04 |
|
Electricity
for Computer |
1c per
hour for fifteen hours per week for 48 weeks |
$7.20 |
$7.20 |
|
Electricity
for Heating/Cooling |
9c per
hour for fifteen hours per week for 48 weeks |
$64.80 |
$64.80 |
|
Total
Deductible Amount
|
|
$319.24 |
$119.24 |
Option 2 (Estimated Running Expenses)
Felix also has the option of using a simpler, less complicated method of
calculating his expenditure:
|
Item |
Calculation |
Deduction
Amount |
Deduction
Amount |
|
Running
Expenses |
26c per
hour for fifteen hours per week for 48 weeks |
$187.20 |
$187.20 |
Once again, while Option 1 gives a greater deduction this year because of
the immediate write-off of a chair costing less than $300, Option 2 will allow greater
ongoing deductions with a simpler calculation, assuming future use and
electricity costs remain similar.
Date of Effect: 1 July 2004
Subject References:
diaries
home office
record-keeping
Legislative References:
ITAA 1997 section 8-1
ITAA 1997 Division 900
ITAA 1997 section 900-25
Related Rulings/Determinations:
TR 1993/30
TR 1995/12
TR 1998/14
ATO references:
File 99/117-1
FOI number: I 1021779
related topics | apprentice tax practitioner program | tax law