The ATO has long held firm on the principle that rent payments (being a form of occupancy costs) are generally outgoings “of a private or domestic nature” and therefore not deductible, even where part of the rented home is used as a home office. However, it has been accepted that in some circumstances, a rent deduction may be claimed if a part of the home is used exclusively for income-producing activities and there is no alternative place of business provided by the taxpayer’s employer.
But with Sydney and Melbourne being plunged into months-long lockdowns, can anyone working from home now claim a tax deduction for paying their rent? After all, office accommodation is explicitly prohibited by state public health orders, and workers have had no choice but to use their primary residence as an office. Some workers may have even moved from the inner city to a larger residence in the suburbs to expand their home office!
Read on for our breakdown of the relevant legislation and case authority that might open the door for claiming a deduction for rent during the COVID-19 pandemic.
When are home office expenses deductible?
Income tax deductions are governed by the Income Tax Assessment Act 1997 (Cth) (ITAA 1997). In particular, s 8-1 sets out the general principle that “any loss or outgoing” is deductible from your assessable income if it is “incurred in gaining or producing your assessable income”; or it is necessarily included in carrying on a “business for the purpose of gaining or producing your assessable income”. However, this is subject to certain exclusions. One of which is that you cannot deduct a loss or outgoing under this principle if “it is a loss or outgoing of a private or domestic nature”.
The principle that expenses of a “private or domestic nature” are not deductible is the reason that the ATO has generally distinguished between two broad categories of costs associated with running a home office. They are:
- (a) Occupancy expenses: Expenses relating to the ownership or use of a home (e.g. rent, mortgage interest, home insurance premiums) that are not affected by the taxpayer’s income-earning activities
- (b) Running expenses: Expenses relating to the use of facilities within the home (e.g. electricity, cleaning costs and furniture)
ATO views – Taxation Ruling TR 93/30
The current ATO position as set out in Taxation Ruling TR 93/30 is that running expenses for any home office can be deductible for the area of the home that is used as a “place of business”, for the portion of time that area is used as a place of business. However, occupancy expenses are only deductible for an area of a home that “has the character of a place of business” – otherwise, occupancy expenses are of a “private or domestic nature” and are not deductible.
Generally, the courts and tribunals have refused to consider a home office as having the “character of a place of business” where working from home is a “matter of convenience”, or choice, to the taxpayer. TR 93/30 sets three requirements which, if satisfied, will qualify a home office as having the character of a place of business allowing for the deduction of occupancy costs:
- 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
- The room or home office is used exclusively or almost exclusively for income producing purposes (TR 93/30)
These principles have been applied in several tribunal cases. For example, the 1986 decision Case T48, 86 ATC 389 (Case T48). In Case T48, the taxpayer was employed by a major oil company as a territory manager. The company provided no office or equivalent for the taxpayer to perform his duties and it was expected that it was his responsibility to provide one. The taxpayer used one bedroom in his rented two-bedroom flat exclusively as an office, and claimed a deduction for a portion of his rent (calculated as the percentage of the total floor area that the office space comprised). The Board of Review allowed this claim on the basis that the home office had the “character of a place of business” sufficient to displace the presumption that rent was an expense of a private or domestic nature. In more recent times, a similar finding was made in McAteer v FC of T 2020 ATC ¶10-536;  AATA 1795, regarding an on-call IT support worker who was not working from home merely for convenience. Does COVID-19 open the door to deductions for rent?
In normal times, most office workers cannot claim a deduction for their rent for using a home office, given an office is provided by their employer. However, during the COVID-19 pandemic lockdown, the office cannot be accessed – stay-at-home restrictions and capacity restrictions have forced many people to work from home for prolonged periods. Applying the second requirement in TR 93/30, many taxpayer’s circumstances are such that there is no alternative place of business and it is necessary to work from home.
The third requirement, that the room or home office is used exclusively (or almost exclusively) for income-producing purposes, may depend on the taxpayer’s particular circumstances and home set-up. However, for many workers currently stuck in lockdown, an exclusive (or almost exclusive) home office space is no longer a luxury but a necessity. This is especially so for workers who have frequent online meetings with clients and teammates that concern sensitive or confidential information, those that need a dedicated distraction-free space, not to mention those who have children at home.
While the ATO has published information on “Working from home during COVID-19” on its website and has made available a short-cut method for claiming running costs, very little has been published regarding claiming occupancy costs (such as rent). In the current COVID-19 pandemic environment, whether your circumstances permit you to claim a deduction for occupancy costs such as rent is certainly worth careful consideration.
This article is the opinion of the author and in no way constitutes legal advice. We recommend reaching out to our expert tax law team who will be able to advise you on your specific circumstances.
Andrew Henshaw, managing director and Fiona Bucknall, paralegal, Velocity Legal
Andrew Henshaw and Fiona Bucknall, Velocity Legal
17 September 2021