BY MIKE ALVAREZ – A claim by a taxpayer for expenses relating to his or her home is not allowable unless the taxpayer can establish that a part of his or her home is dedicated for business purposes. The business part of the home must be accepted by the public as the taxpayer’s place of business.
For example, a doctor who operates a surgery in part of his or her home may claim a deduction for expenses connected with the surgery.
Deductions for home office expenses connected directly to a taxpayer’s home, such as interest on mortgage, rates, rent and taxes, are not available to a taxpayer who chooses to perform some work at home for reasons of convenience.
Other operating costs such as lights, heating and depreciation of office assets such as desk, computer, floor coverings and curtains that are used exclusively in the taxpayer’s home office are deductible. The approach taken by the High Court in the case of Handley v FCT (1981) 11 ATR 644 to home office expenditure is based on the notion that expenditure on the house itself is connected to its function as the taxpayer’s residence.
In Handley’s case, the taxpayer, a barrister, claimed a deduction for home office expenses of interest on a mortgage, rates and insurance premiums. The taxpayer’s home office occupied one-fifteenth of his home’s total floor space and he claimed a deduction for this proportion of the costs.
The taxpayer purchased the home because it had a room in which he could establish a home office and its non-work use is minimal. The Commissioner allowed as a deduction expenditure on estimated use of electricity and cleaning but disallowed the other expenses. The Court held that the expenditure (interest, rates and insurance costs) on the taxpayer’s home was not deductible regardless of the fact of the home office.
Mike Alvarez, a CPA and Registered Tax Agent, is the director of QA Audit and Tax Services Pty Ltd, a CPA Practice. He is also an ASIC registered SMSF Auditor and a Solicitor in Australia, tel. 02 9676 6500.
