Answer To Question 1:
Issues: Whether or not Samantha will be considered eligible for claiming an allowable deductions regarding the home office expenses incurred during the year ended 30th June 2022.
Deductions For Home Office Expense:
The taxpayers are given permission to claim deduction under sec 8-1 ITAA 1997 regarding their home office expenses that is incurred for occupancy and running expenses on the basis of area of home that they have used for the purpose of doing business. As noted the common occupancy expenditure are rent, rates, premium, insurance etc. while some common running expenses are lightning, cooling, heating and depreciation.
When a taxpayer uses his home office as the place of business a relevant proportion of both types of expenditure might be permitted as tax deduction. It must be noted that when taxpayer uses home office simply relating to their income-making activities but has not significant character of place of business only a relevant part of running expenditure is permitted as deduction.
The taxpayers are permitted to claim deduction for work-related part of heating and electricity. Furthermore, the taxpayers are given permission to claim deduction for decline-in-value of cost relating to depreciable items such as desks, bookshelves that is used by them for the purpose of work.
Deductions For Electricity, Telephone And Internet Expense
Samantha reports that she has an assessable income of $25,000 for the year ended 30th June 2022. Besides this, she reports that she is carrying on yoga lessons. Later she reports that she has set aside a room in her house for conducing her yoga classes and address her business matters. The floor area that is set aside for room is 1/8th of total floor area of house. Samantha reports that she uses room for 30% of classes and business administration purpose.
Samantha reports incurring electricity expense of $1,500. Samantha is permitted to claim deduction for electricity expense on the basis of floor area and 30% of proportion is used for business purpose. Samantha also reports receiving invoices late for electricity, telephone and internet respectively for June 2021 and it was paid in July 2021. Referring to sec 8-1 of ITAA 1997, deductions can be claimed by Samantha in the present financial year based on the fact that the expenses has been incurred, even though it is not paid actually. Samantha must note that she can claim deduction on accrual basis and she can recognize her income on cash basis.
Issue: Can Samantha claim deduction for occupancy expenses incurred for her home office purpose under sec 8-1 of ITAA 1997?
Occupancy Expense Deductions:
The home office expense is divided in two categories namely the occupancy expenses and running expense. The occupancy expense refers to those that an individual is required to pay to own, rent or use their home. This comprises of mortgage interest, rent, council rates, land taxes, house and content insurance premiums. If an individual taxpayer is running a home based business, they are permitted to claim deduction for a part of their occupancy expenditure which is related to their business. If a taxpayer is considered eligible for claiming occupancy expenses, they are also permitted to claim deduction for running expenditure.
As per the ATO, taxpayers are permitted to claim deduction for the percentage of occupancy expenditure which is related to their home area that they have set aside to use it for business purpose and the percentage of the year that area of house was used for business purpose. One common method of working out the amount to claim as deduction is to work out the actual floor area that a taxpayer has used for their business as the percentage of total floor area of their entire house.
As noted in Swinford v FCT (1984), the taxpayer was the self-employed script writer and he was permitted to claim deduction for the part of rent paid for her house, where she had set aside a separate room in house for study purpose. The taxpayer wrote script in her separately dedicated house and did not had any separate business premises.
Deductions For Phone, Internet, Rent And Cleaning Expenses
She also reports incurring expense towards mobile phone and internet that she uses 50% of time for business purpose. Hence, Samantha is only permitted to claim deduction under sec 8-1 of ITAA 1997 up to 50% of work purpose that she has incurred in producing her assessable income.
Later, Samantha reports paying rent and cleaning expenses that amounted to $19,000 and $200 respectively for the year. Referring to the case of Swinford v FCT (1984) in the present circumstances of Samantha, it must note that she should apportion the rent on the basis of floor area of her room that is dedicated for business and a deduction of up to 30% can be claimed as the business proportion use of that room. This is because she has dedicated a separate room in her house to use it for her Yoga classes and business administration purpose. As a result of covid-19 this is only considered as the place where she is carrying on her writing activities and her room was the only the base of operations.
Issue: Can Samantha claim deduction for numerous running expenses incurred for her home office purpose within positive limbs of sec 8-1 ITAA 1997?
Deductions For Running Expenses:
The running expense on the other hand are regarded as an increased cost of using the facilities of home for carrying out business activities. A taxpayer can claim deduction for running expenses given that they carry on business activities from home, such as separately setting up a desk or study in a lounge room, despite that it does not has the character of place of business. No deduction is allowed to taxpayer for private use of home facilities under sec 8-1 (2) of ITAA 1997. The occupancy expenditure can be normally apportioned on the basis of floor area.
Deductions For Tea, Milk, Coffee And Decline In Value
Samantha also reports incurring expenses towards coffee, milk, sugar and toilet paper. These expenses have been classified as private expense under sec 8-1 (2) of ITAA 1997. Samantha must note that she cannot claim deduction for these expenses for her home office purpose.
Accordingly, in the present circumstances, it is found that Samantha has bought a computer that had a useful effective life of 2 years. The computer held by Samantha should be classified as a depreciating asset because it has very limited effective life and it is reasonably anticipated to fall in value over the time. Samantha is permitted to claim deduction for the decline in value of computer that she has held for the year. To claim deduction for computer, prime cost method has been followed. The deduction is apportioned up to taxable use of 30% of computer in the present financial year.
She later reports incurring an expense of $150 in replacing her mobile phone screen that she broke by accidently dropping it in her backyard. Consequently, the repair expenses incurred by Samantha is not an allowable deduction since it is a private expense under sec 8-1 (2) of ITAA 1997.
Calculations Of Taxable Income:
The total amount of tax payable by Samantha is computed below.
Calculation of Taxable Income and Tax Payable
In the books of Samantha
For the year ended 30th June 2022
Total Assessable Income
Electricity (1/8 of floor area x 30% of business use)
Add: (Prior Year Invoices)
Stationary (30% of business use)
Mobile Phone (50% of business use)
Add: (Prior Year Invoices)
Internet (50% of business use)
Add: (Prior Year Invoices)
Rent (19000 x 1/8 x 30% of business use)
Cleaning Products (1/8 x 30% of business use)
Decline in Value of Computer (1900×365/365×100%/2×30%)
Other Business Expense
Total Allowable Deductions
Total Taxable Income
Tax On Taxable Income
Add: Medicare Levy
Less: PAYG Instalment
Net Tax Payable
Conclusively, total amount of tax payable by Samantha for the income year ended 30th June 2022 stands $231.3.