HWZG and Commissioner of Taxation (Taxation)
[2016] AATA 1017
•6 December 2016
HWZG and Commissioner of Taxation (Taxation) [2016] AATA 1017 (6 December 2016)
Division
TAXATION & COMMERCIAL DIVISION
File Numbers
2016/3278-3280
Re
HWZG
APPLICANT
And
Commissioner of Taxation
RESPONDENT
DECISION
Tribunal Senior Member CR Walsh
Date 6 December 2016 Place Perth The Tribunal affirms the decision under review.
....(Sgd)......................................
Senior Member CR Walsh
CATCHWORDS
INCOME TAX – deductibility of home office expenses – what constitutes “fair and reasonable” apportionment on a “floor area” basis on the facts in the Applicant’s particular case – decision under review affirmed
LEGISLATION
Income Tax Assessment Act 1936 – s 51(1)
Income Tax Assessment Act 1997 – s 8-1
Taxation Administration Act 1953 – s 14ZZK(b)CASES
Bellinz v Federal Commissioner of Taxation (1998) 84 FCR 154
Cooperative Bulk Handing Ltd v Federal Commissioner of Taxation [2011] FCA 508
Federal Commissioner of Taxation v McMahon and Another (1997) 79 FCR 127
Federal Commissioner of Taxation v Reef Networks Pty Ltd (2004) 57 ATR 375
Hastie Group Ltd v Commissioner of Taxation (2008) 172 FCR 496
Lamont v Federal Commissioner of Taxation (2005) 144 FCR 312Ronpibon Tin No Liability v Federal Commissioner of Taxation (1949) 78 CLR 47
SECONDARY MATERIALS
Australian Master Tax Guide, Tax Year-End Edition 30 June 2016, 59th edition, Wolters Kluwer, 2016 at 16-480
Taxation Ruling TR 93/30 - Income tax: deductions for home office expenses
REASONS FOR DECISION
Senior Member CR Walsh
6 December 2016
INTRODUCTION
The Applicant seeks a review of the Commissioner’s objection decision, dated 23 June 2016, which disallowed the Applicant’s objection, dated 16 February 2016, against a private ruling, issued by the Commissioner on 4 February 2016, in relation to the deductibility of home office expenses under s 8-1 of the Income Tax Assessment Act 1997 (the ITAA 1997) in respect of the income tax years ended 30 June 2016, 30 June 2017 and 30 June 2018 (the Relevant Years).
It is not in dispute that the Applicant uses part of his home for business purposes (namely, an inside office, the “right hand side” driveway (the RHS driveway) and an adjoining secure garage).
What is in dispute, and what must be determined by the Tribunal in this case, is the appropriate method of calculating the deduction allowable under s 8-1 of the ITAA 1997 for the Applicant's home office expenses. The parties disagree on the formula to be used to calculate the deduction, and in particular, whether the “left hand side” driveway (the LHS driveway) and contiguous open carport ought to be included in the “total floor area” for the purposes of the apportionment calculation.[1]
[1] Pursuant to s 14ZZK(b) of the Taxation Administration Act 1953 (the TAA), the Applicant bears the burden of proving that the Commissioner’s objection decision should have been made differently and, if he is unable to do so, then the Commissioner’s decision must stand.
FACTUAL & PROCEDURAL BACKGROUND
On 19 October 2015, the Applicant applied to the Commissioner for a private ruling on the following questions:
1.May the taxpayer claim occupancy expense deductions in respect of each or both of the driveway and corresponding garage facing right side (RHS), of his home?
2.Does the Commissioner accept the calculation method at Item 13 of the description of the scheme?
(the Ruling Application)
The “Facts describing the scheme or circumstances” are set out in the Ruling Application as follows:
The Taxpayer:
1. Is employed full-time as an electrician and has been for many years.
2.Has recently commenced as a sole trader with an ABN, a year-round electrical contracting business to be run in his spare time and with the hope to eventually replace his job.
3. Keeps proper business financial records.
4. Has started to generate assessable business revenue.
5.Has no other place of business, the home has a small sign out front and the address is on his business card.
6. Owns and uses a utility vehicle, overwhelmingly to carry on his business.
7.Necessarily and almost exclusively uses the RHS driveway and corresponding garage in carrying on his business and with ample alternative storage for personal items.
8.Necessarily uses the garage as a secure workshop, storeroom, and parking space for his utility vehicle, tools and ladders etc. and inventory business materials (stock) and intends for customers to visit as required.
9.Has a wife who drives and parks for private and domestic purposes, only using the LHS driveway and carport.
10.And his wife do[es] (sic.) not own or use any other motor vehicles at the subject property.
11.Is satisfied that the RHS driveway and garage are equally fit “as-is” for the relevant business purpose i.e.(sic)
12.Conducts his business administration tasks from a dedicated office within the subject property.
13.Wishes to use the floor space method (in m2), to quantify his occupancy expense claims as a business use percentage in summing the inside office with the RHS driveway (and garage as located under the main roof of the dwelling), to then divide the corresponding total by the size of the habitable areas of the house, plus the driveway.
The Commissioner issued his private ruling on 20 November 2015 (authorisation number 1012914379041) (the First Private Ruling).[2]
[2] Exhibit 1 at pp28-37.
On 30 November 2015, the Applicant advised the Commissioner of an error in the First Private Ruling, and asked for a replacement private ruling.[3]
[3] Exhibit 1 at pp38-45.
On 4 February 2016, the Commissioner issued the Applicant with a replacement private ruling (authorisation number 101295866539) (the Second Private Ruling). [4] The Second Private Ruling states:
[4] Exhibit 1 at pp 53-55.
Question 1
Can all of the individual business use areas nominated in the application be claimed for occupancy expense purposes?
Answer
Yes.
Question 2
Does the Commissioner accept the calculation method you’ve put forward in your private ruling application?
Answer
No.
In relation to Commissioner’s answer to Question 2, the “Reasons for Decision”, attached to the Second Private Ruling, state:
Where areas of property are used for business purposes and included in the calculation of deductible occupancy expenses then it is considered fair and reasonable that similar areas of the property that are used for private purposes must be taken into account in the apportionment calculation.
Therefore, as you are claiming occupancy expenses in relation to the garage and the RHS driveway it is considered that a fair and reasonable apportionment must take into account the car port and LHS driveway that are used for private purposes. As the method that you have put forward does not do this, the Commissioner does not accept it as an appropriate method of apportionment for the purposes of calculating your deduction for occupancy expenses.
It is considered that a fair and reasonable method of apportionment in your circumstances is as follows:
[Inside office area + RHS driveway area + garage area]/[habitable areas of the house (including garage) + RHS driveway + car port area + LHS driveway area].[5]
[5] Exhibit 1 at p57.
The Second Ruling identifies the “Relevant facts and circumstances” of the scheme as follows:
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.
The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are:
• your application for private ruling which we received on 30 November 2015
•your original application for private ruling which we received on 17 October 2015
You are currently employed on a full time basis as an electrician. You have recently commenced operating as a contractor in your spare time and have obtained an ABN for this purpose. Your intention is to eventually operate as a contractor on a full time basis.
Your contracting activity is carried on from your residence. You have placed a small sign at the front of the property and have printed business cards which identify the property as your business address. You have no other place of business.
The property has two driveways. The right hand side (RHS) driveway and corresponding garage are used for the business. The garage is used as a secure workshop, storeroom and parking space for the work vehicle as well as the storage of ladders, tools and materials. You intend that customers will visit as required. You have advised that there is ample alternative storage space for personal items.
The left hand side (LHS) driveway and open car port provides parking for private and domestic purposes.
You conduct the administration of your business activities from a dedicated office within the property.
The method of calculating the deductible portion of your occupancy expenses that you wish to use and that you want the Commissioner to confirm is acceptable is as follows:
[Inside office area + RHS driveway area + garage area] / [habitable areas of the house (including garage) + RHS driveway area] (Emphasis added)[6]
[6] It is well established that the Tribunal is confined by the scheme (facts and circumstances) as described in a private ruling and that it cannot depart from that description in any respect: Federal Commissioner of Taxation v McMahon and Another (1997) 79 FCR 127 (McMahon) at 132-134, 140-141 and 149-150. The Tribunal cannot create its own description of the scheme, elaborate upon or make assumptions about the scheme, not cane the tribunal add further facts, substitute other facts or otherwise alter the scheme: Mc Mahon; Bellinz v Federal Commissioner of Taxation (1998) 84 FCR 154 at 160; Federal Commissioner of Taxation v Reef Networks Pty Ltd (2004) 57 ATR 375 at [6]; Lamont v Federal Commissioner of Taxation (2005) 144 FCR 312 at 319; Hastie Group Ltd v Commissioner of Taxation (2008) 172 FCR 496 at [3] and Cooperative Bulk Handling Ltd v Federal Commissioner of Taxation [2011] FCA 508 at [16].
On 16 February 2016, the Applicant lodged an objection to the Second Private Ruling and, in particular, the Commissioner’s answer to Question 2, as set out in paragraph 8 above (the Objection).[7] More specifically, the Objection states:
…[the Applicant] objects to your answer to Q.2 of the ruling because of:
1.The Commissioner’s failure to note any supporting materials for his interpretation of the tax law other than ITAA 1997 S 8-1 itself which is very broad.
2.The Commissioner’s imposition of a “Like-for-like” concept, as without appropriate basis in the circumstances and;
3.The fact that the carport and the garage are most certainly not “like-for-like”.
…
Summary: In the unique context of a home business property such as this one that generally runs year round, in the interests of consistency of rationale in the administration of the tax law, a “like-for-like” approach would need to apply to all internal and external areas whereas we think that is impractical and moreover just plain wrong on a number of grounds. Hence, a strictly combined approach of “habitable” for personal use and “set aside” for business use is the only fair and reasonable way to determine the matter as anything less introduces foreign elements as completely unrelated to the business use of the property (which after all is at the heart of the matter hereby to be decided) and further given as we know for tax purposes that a main residence can exist on up to 2 hectares and despite which, the entirety of that 2 hectares is inconsequential in calculating the business use percentage unless external areas are also designated business use areas, thereby, it is only the external areas having been exclusively or almost exclusively set aside for business use that may be included in the denominator of the relevant formula.
[7] Exhibit 1 at pp61-64.
On 23 June 2016, the Commissioner disallowed the Objection (the Objection Decision).[8]
[8] Exhibit 1 at pp85 -92.
On 23 June 2016, the Applicant applied to the Administrative Appeals Tribunal (the Tribunal) for a review of the Objection Decision.[9]
[9] Exhibit 1 at p1.
ISSUE
The sole issue for determination by the Tribunal in this application is whether, in calculating the deductible portion of the Applicant’s home business expenses for the purposes of s 8-1 of the ITAA 1997, the Applicant’s LHS driveway area and corresponding open carport (which are used for private purposes) must be taken into account in the apportionment calculation and, more specifically, in the denominator of the apportionment calculation.
RELEVANT LAW & ANALYSIS
Section 8-1 of the ITAA 1998 permits a taxpayer to deduct from his taxable income any loss or outgoing to the extent that it is either incurred in gaining or producing his assessable income, or necessarily incurred in carrying on a business for the purpose of gaining or producing his assessable income, so long as the loss or outgoing is not one that is capital, private or domestic in nature.
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. However, where the home is used for income producing purposes, and has the character of a place of business, a deduction may be allowable for a portion of the expenses.
As stated above, the Commissioner accepts, and it is not in dispute, that the Applicant’s inside office, RHS driveway and adjoining secure garage are used by the Applicant for business purposes. Consequently, the Applicant is entitled to deduct his occupancy and running expenses under s 8-1 of the ITAA 1997, to the extent that those expenses are incurred in gaining or producing assessable income.
The seminal case in relation to apportionment is generally considered to be the High Court’s Ronpibon Tin No Liability v Federal Commissioner of Taxation (1949) 78 CLR 47 (Ronpibon). In Ronpibon the High Court of Australia stated (at 56) the following in relation to s 51(1) of the Income Tax Assessment Act 1936 (being the predecessor to s 8-1 of the ITAA 1997):
…s 51(1) adopts a principle that will allow of the dissection and even apportionment of losses and outgoings. It does this by providing for the deduction of losses and outgoings to the extent to which they are incurred in gaining or producing assessable income.
The High Court further stated (at 59):
…there are at least two kinds of items of expenditure that require apportionment…The other kind of apportionable items consists in those involving a single outlay or charge which serves both objects indifferently…With the latter kind there must be some fair and reasonable apportionment of the extent of the relation of the outlay to the assessable income. It is an indiscriminate sum apportionable, but hardly capable of arithmetical or ratable division because it is common to both objects. (Emphasis added)
Adopting the approach of the High Court in Ronpibon, any apportionment of expenses relating to a home (which is a single outlay serving both business and private purposes) must be subject to a “fair and reasonable apportionment”.
Importantly, in Ronpibon, the High Court said (at 60) that what is fair and reasonable depends on the facts of the particular case.
The Commissioner’s approach to what constitutes “fair and reasonable” apportionment is set out in Taxation Ruling TR 93/30, titled “Income tax: deductions for home office expenses”, wherein the Commissioner states:
17.The actual amount which can be claimed is dependent on the taxpayer’s individual circumstances. In most cases, the apportionment of the total expense incurred on a floor area basis is the most appropriate method. (Emphasis added)
The Applicant seeks to calculate the apportionment of his operating and running expenses on a “floor area” basis. The Commissioner accepts that apportionment on a “floor area” basis is appropriate in the Applicant’s particular circumstances.
The formula commonly used for apportioning expenses on a “floor area” basis is as follows:[10]
Floor area related to the income earning activity x Relevant
Total floor area expenditure
[10] See Australian Master tax Guide, Tax Year-End Edition 30 June 2016, 59th edition, Wolters Kluwer, 2016 at 16-480.
The issue in this case is whether the “total floor area” for the purposes of the apportionment calculation should include the LHS driveway and adjoining open carport area.
The Commissioner contends that in order to arrive at a “fair and reasonable” assessment of the extent of the relation of the outlay to assessable income, it is necessary to include the LHS driveway and corresponding open carport area in the “total floor area”. This is the case because where areas of a property are used for business purposes and included in the floor area related to the income earning activity, then it is “fair and reasonable” that similar or equivalent areas of the property that are used for private purposes are included in the “total floor area”. According to the Commissioner, in the Applicant’s case, given that the RHS driveway and garage areas are included in the floor area related to the income earning activity, it is “fair and reasonable” that the LHS driveway and corresponding open carport area are included in the denominator of the apportionment formula.
On that basis, the Commissioner contends that the formula which ought to be used to calculate the apportionment of the Applicant’s expenses is as follows:
[Inside office area + RHS driveway area + garage area] / [habitable areas of the house (including garage) + RHS driveway area + LHS driveway area + carport area].
In contrast, the Applicant seeks to include the RHS driveway and adjoining garage area in the “floor area related to the income earning activity”, but to exclude the LHS driveway and corresponding carport area from “total floor area”.
The Tribunal considers the Commissioner’s approach to apportionment to be a “fair and reasonable” approach to apportionment in the particular circumstances of the Applicant’s case: Ronpibon. The effect of the Applicant’s approach to apportionment is, as contended by the Commissioner, to exclude from the denominator a comparable area of the Applicant’s home, and in so doing, artificially inflate the proportion of the Applicant’s home that is used for business purposes. Such an apportionment is, as submitted by the Commissioner, not “fair and reasonable” in the Applicant’s particular case. As asserted by the Commissioner, a “fair and reasonable” methodology would treat these areas (i.e. the RHS driveway and corresponding secure garage and the LHS driveway and open carport) equally, either by including, or excluding, both equivalent areas.
DECISION
For the above reasons, the Tribunal affirms the Objection Decision.
I certify that the preceding 30 (thirty) paragraphs are a true copy of the reasons for the decision herein of Senior Member CR Walsh .......(Sgd).....................................
Administrative Assistant
Dated 6 December 2016
Date of hearing 1 December 2016 Representative for the
ApplicantMr F Genovesi
IntellisolveCounsel for the
RespondentRepresentative for the
RespondentMs HA Tiplady
Mr R McGrade
Australian Taxation Office
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