"The Taxpayer" and Commissioner of Taxation
[2007] AATA 1830
•28 September 2007
Administrative Appeals Tribunal
DECISION AND REASONS FOR DECISION [2007] AATA 1830
ADMINISTRATIVE APPEALS TRIBUNAL )
) No WT200600641
TAXATION APPEALS DIVISION ) Re “THE TAXPAYER” Applicant
And
COMMISSIONER OF TAXATION
Respondent
DECISION
Tribunal Mr A Sweidan, Senior Member Date28 September 2007
PlacePerth
Decision The Tribunal affirms the decision under review.
..........[Sgd Mr A Sweidan]...........
Senior Member
CATCHWORDS
Income Tax - deductions - apportionment of property expenses where property part owned and part of property used for business purposes - whether floor area appropriate basis for apportionment.
LEGISLATION
Income Tax Assessment Act 1997 (Cth) s8-1
Income Tax Assessment Act 1936
Fringe Benefits Tax Assessment Act 1986
Taxation Administration Act 1953
CASES
Thomas v Federal Commissioner of Taxation (1972) 3 ATR; 72 ATC 4094
Federal Commissioner of Taxation v Faichney (1972) 129 CLR 38; (1972) 3 ATR 435; 72 ATC 4245]
Lunney v. Commissioner of Taxation (1957-8) 100 CLR 478 at 497
Swinford v Federal Commissioner of Taxation (1984) 15 ATR 1154; 84 ATC 4803
Ronpibon Tin NL and Tongkah Compound NL v Federal Commissioner of Taxation [1949] HCA 15; (1949) 78 CLR 47
Handley v Federal Commissioner of Taxation (1981) 148 CLR 182
Federal Commissioner of Taxation v Forsyth 81 ATC 4157
REASONS FOR DECISION
28 September 2007 Mr A Sweidan, Senior Member BACKGROUND
1. The applicant seeks review pursuant to s14ZZ(b) of the Taxation Administration Act 1953 (TAA) of the respondent’s objection decision dated 28 February 2006 in respect of a private ruling issued to the applicant, dated 23 January 2006.
2. By application for private ruling dated 9 January 2006 the applicant sought a private ruling from the respondent in relation to a property held by the applicant as tenants in common with it’s two directors Mr and Mrs A (the arrangement). The private ruling applied to the financial years ended 30 June 2005, 2006 and 2007.
3. Specifically the applicant sought clarification of the following issues as they relate to the arrangement:
(a)the application of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) to the arrangement;
(b)the application of Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) to the arrangement; and
(c) the apportionment of expenses.
Only the last mentioned issue is relevant in this application.
4. By Notice of Private Ruling dated 23 January 2006 the respondent advised that an apportionment of expenses should be on a floor area basis entitling the applicant to claim 10% of occupancy expenses.
5. It should be noted that in relation to the year ended 30 June 2005, an assessment issued to the applicant prior to the objection to the private ruling, therefore the objection in this matter is invalid to the extent it relates to the year ended 30 June 2005; paragraph 359-60(3)(a) of Schedule 1 of the TAA.
6. The issue before the Tribunal is whether the applicant is entitled to a deduction of 50% of expenses incurred in respect of the property under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for the financial years ended 30 June 2006 and 2007, as asserted by the applicant.
FACTS
7. The following matters are not in dispute.
8. The applicant is a private Australian resident company which has two directors and shareholders – Mr and Mrs A.
9. The applicant carries on businesses as an Authorised Representative of an Australian Financial Services Licensee and a provider of musical and related services.
10. In September 2002 the applicant together with its two directors purchased a property situated at 22 May Street East Fremantle in the state of Western Australia (‘the property’).
11. The property is owned by the applicant (50%) and the directors (who together own 50%) as tenants in common.
12. The property has a total land area of approximately 662m². The property includes a building with a floor space of approximately 200m², a ‘half wrap around veranda and two small garden sheds’ (T3 p65).
13. The applicant’s businesses are mainly operated from a front room in the property which is set up as an office/studio which is used exclusively for business purposes by the applicant. The office/studio has an area of approximately 20m² (representing approximately 10% of the total floor space of the building and 3% of the total land area of the property).
14. The directors and their two young children use the property as their main residence and each tenant in common has unrestricted access to the whole property.
15. The applicant claimed 50% of property related expenses in its company tax returns for the years ended 30 June 2003, 2004 and 2005.
BURDEN OF PROOF ON APPLICANT
16. Section 14ZZK of the TAA states:
“On an application for review of a reviewable objection decision:
(a)the applicant is, unless the Tribunal orders otherwise, limited to the grounds stated in the taxation objection to which the decision relates; and
(b) the applicant has the burden of proving that:
(i)if the taxation decision concerned is an assessment (other than a franking assessment) – the assessment is excessive; or
(ii) if the taxation decision concerned is a franking assessment – the assessment is incorrect; or
(iii) in any other case – the taxation decision concerned should not have been made or should have been made differently.”
APPLICANT’S CASE
17. The applicant’s director Mr A represented the applicant and gave evidence and made submissions. In essence it was asserted that a 50% apportionment of expenses related to the property should be allowed because:
17.1applicant has a 50% ownership interest in the property.
17.2applicant has unrestricted access to the whole of the property although its business activities are mainly carried on in the office/studio area.
17.3this is not a “home office” case such as those referred to in the Commissioner’s Public Ruling TR 93/30 and cases referred to therein.
17.4the expenses should be apportioned on the basis that the applicant, as 50% owner as tenant in common can use the whole of the property and a 50% apportionment is therefore appropriate.
RELEVANT STATUTORY PROVISIONS
18. Section 8-1 of the ITAA 1997 provides:
“8-1(1)You can deduct from your assessable income any loss or outgoing to the extent that:
(a)it is incurred in gaining or producing your assessable income; or
(b)it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income.
8-1(2)However, you cannot deduct a loss or outgoing under this section to the extent that:
(a it is a loss or outgoing of capital, or of a capital nature; or
(b) it is a loss or outgoing of a private or domestic nature; or
(c)it is incurred in relation to gaining or producing your exempt income or your non-assessable non-exempt income; or
(d) a provision of the Act prevents you from deducting it.”
TRIBUNAL’S FINDINGS
19. In determining whether expenses were incurred in earning assessable income, what must be examined is the essential character of the expenditure (Lunney v. Commissioner of Taxation (1957-8) 100 CLR 478 at 497).
20. The Tribunal notes that the Commissioner’s Taxation Ruling TR 93/30 provides guidelines for the deductibility of what are referred to as “home office expenses”. The applicant asserts that the guidelines are not applicable to its case. However the Tribunal notes that the property is the home of the A family and considers TR 93/30 to be relevant although it is of course not binding on the Tribunal.
21. TR 93/30 states expenses which relate to the use or ownership of a home (or facilities in it) normally have a private or domestic character and are not allowable deductions under section 8-1 ITAA 1997 [Thomas v Federal Commissioner of Taxation (1972) 3 ATR; 72 ATC 4094 and Federal Commissioner of Taxation v Faichney (1972) 129 CLR 38; (1972) 3 ATR 435; 72 ATC 4245]. However, in certain circumstances, part of these expenses may be allowed as a deduction. The allowable deductions will depend on whether an area of the home has the character of a place of business or is merely a private study. (Taxation Ruling TR 93/30 – para 9).
22. In deciding cases concerning home office expenses, courts and tribunals have consistently drawn a distinction between cases:
(a)where part of a home can be characterised as a place of business; and
(b)where a room is used as a study or home office merely as a matter of convenience.
The reason this distinction is important is that if an area of the home has the character of a place of business then expenses associated with that part of the home can be said to take on a business or businesslike character and are allowable deductions [Swinford v Federal Commissioner of Taxation (1984) 15 ATR 1154; 84 ATC 4803 (Swinford’s case)]. In effect, the area used loses its domestic character. (TR 93/30 – para 10)
23. Whether an area of the home has the character of a place of business is a question of fact which depends on the particular circumstances of each case. The decision in each case will depend on whether, on a balanced consideration of:
·the essential character of the area;
·the nature of the taxpayer’s business; and
·any other relevant factors,
the area constitutes a “place of business” in the ordinary and common sense meaning of that term.
24. The absence of an alternative place for conducting income producing activities has also influenced a court or tribunal to accept a part of a taxpayer’s residence as a place of business. Examples include:
·a self employed script writer using one room of a flat for writing purposes and for meetings with television staff (Swinford supra);
·an employee architect conducting a small private practice from home (Case F53, 74 ATC 294; Case 65, 19 CTBR(NS) 452);
·a country sales manager for an oil company whose employer did not provide him with a place to work (Case T48, 86 ATC 389; Case 47, 29 CTBR (NS) 355).
In each of these cases the taxpayer was able to show that, as a matter of fact, there was no alternative place of business, it was necessary to work from home, and that the area or room in question was used exclusively or almost exclusively for income producing purposes.
25. In this case the facts show that part of the property can be characterised as a place of business, namely the office/studio set aside for the exclusive use by the applicant for running its business.
26. As stated in paragraph 7 of TR 93/30 if an area of the home has the character of a place of business some part of the expenses relating to ownership or use of a home and expenses relating to the use of facilities within the home may be claimed as a deduction. It is said that in most cases the apportionment of expenses should be made on a floor area basis.
27. It is not disputed that the property is the residence of Mr and Mrs A and their children. However it is also common cause that part of the property is the place of business for the applicant, therefore some of the expenses incurred in respect of the property are partly deductible. The question is what is the appropriate basis of apportionment.
Apportionment
28. In Ronpibon Tin NL and Tongkah Compound NL v Federal Commissioner of Taxation [1949] HCA 15; (1949) 78 CLR 47 the High Court stated:
“Section 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 the assessable income. In the second place it introduces an alternative ground or head of deduction; it allows the deduction of all losses and outgoings to the extent to which they are necessarily incurred in carrying on a business for the purpose of gaining or producing such income.”
29. Further the High Court stated:
“...the provision contained in s51(1), as has been already said, contemplates apportionment. The question what expenditure is incurred in gaining or producing assessable income is reduced to a question of fact when once the legal standard or criterion is ascertained and understood. This is particularly true when the problem is to apportion outgoings which have a double aspect, outgoings that are in part attributable to the gaining of assessable income and in part to some other end or activity. It is perhaps desirable to remark that there are at least two kinds of items of expenditure that require apportionment. One kind consists in undivided items of expenditure in respect of things or services of which distinct and severable parts are devoted to gaining or producing assessable income and distinct and severable parts to some other cause. In such cases it may be possible to divide the expenditure in accordance with the applications which have been made of the things or services. 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 assessment of the extent of the relation of the outlay to assessable income.
...the Court must make an apportionment which the facts of the particular case may seem to make just.” [emphasis added]
30. The respondent asserted that the circumstances of this case fall into the latter category. He submits that a fair and reasonable basis of apportionment given the applicant’s circumstances is on a floor area basis. In the Tribunal’s view the applicant has not shown that any other basis is appropriate.
31. In its application for private ruling the applicant stated the office/studio is about 20m2 and represents around 10% of the total floor space (T3 p65). Based on this information the respondent determined the applicant is entitled to claim 10% of the occupancy expenses on a floor area basis.
32. The applicant contends that the appropriate basis for apportionment is the percentage of ownership of the property. The Tribunal is of the view that on the evidence before the Tribunal the applicant has not shown that this is a fair and reasonable basis of apportionment, and there is no authority to support this contention.
33. It is clear from s8-1 that irrespective of the ownership of the property, deductions are only allowable to the extent that they are not private or domestic in nature.
34. In Handley v Federal Commissioner of Taxation (1981) 148 CLR 182 both Wilson J (at page 4176) and Murphy J (at page 4174) contemplated there may be situations where expenses may be apportioned. Murphy J said:
“The words ‘to the extent’ in the domestic exception in s51(1) require apportionment in cases where the outgoing is not wholly allowable, because it is to some extent of a domestic nature.”
35. The applicant contends “...the common access areas such as the bathroom, living area and kitchen, normally private and domestic in nature, are in fact used for private purposes and for business purposes.”
36. The applicant also contends that “...if the expenses are not allowable on a 50/50 basis...and that actual use on a floor area basis be demonstrated” the percentage deductible should be 51.6% “on the basis that in addition to the exclusive use of the office the applicant also has shared use of the common access areas.” The Tribunal rejects this contention.
37. The courts and tribunals have clearly drawn a distinction between a “place of business” and a home study as a matter of convenience. While the courts have allowed a deduction for additional running expenses incurred as a result of income producing activities in a home study, the extra expenditure must relate to facilities provided exclusively for the taxpayer’s benefit while he or she works.
38. When considering the deductibility of heating/cooling and lighting expenses from a CSIRO research scientist who often worked from home the High Court in Federal Commissioner of Taxation v. Faichney 72 ATC 4245 (at 4250) stated:
“...to the extent to which the expenditure is incurred in providing light and heating for the taxpayer exclusively whilst he is engaged in work from which he derives income it may be said to be an expense having a business or employment character. By reasons of that circumstance it is not an expense of a private or domestic nature. If, however, the light or heating are provided, not exclusively for the taxpayers benefit whilst he is working, but also for the members of his family, the expenditure continues to have a private or domestic character and to that extent falls within the exception to s51(1).”
39. In Handley’s case (supra) and Federal Commissioner of Taxation v Forsyth 81 ATC 4157 a majority of the High Court held that the taxpayers were not entitled to the deductions claimed as the expenses were essentially domestic in character. The home study in each case remained an integral part of the taxpayer’s home and was not, in a real sense, a place of business.
40. The Tribunal finds that while rooms and areas of the property other than the office/studio may well have been used partly for business purposes, they are nevertheless primarily used by Mr and Mrs A and their family for private purposes and therefore any business usage is merely incidental to their primary function as a home.
41. The Tribunal finds that, in this case, the essential character of the expenses relevant to the common access areas was of a private and domestic nature.
DECISION
42. The Tribunal is of the view that, for the reasons set out above, the decision under review should be affirmed as the correct or preferable decision.
I certify that the 42 preceding paragraphs are a true copy of the reasons for the decision herein of Mr A Sweidan, Senior Member
Signed: ..................[Sgd Ms C Skinner].......................
AssociateDate of Hearing 30 April 2007
Date of Decision 28 September 2007
Representative for the Applicant Applicant’s Director
Solicitor for the Respondent Ms F Parcell, Australian Taxation Office
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