Claiming Mortgage Interest, Rent and Council Rates
Can and should you claim your Home Loan, Rent, Rates and Contents Insurance?
We have seen and heard many comments from educators about whether they are entitled to claim part of these types of expenses for tax purposes. While everyone’s circumstances are different in determining this, we have also seen some very broad and scary statements made from both Educators and Accountants on how the law applies to these expenses.
Most of the threads usually end up with everyone being more confused than when they started with no real resolution.
Rather than rely on our opinion, or upon the specific Accountant you may choose to listen to, we have prepared a brief summary of some private rulings issued by the tax office in relation to claiming part of your mortgage interest and rates. The results may come as a surprise to a number of Accountants and the advice they have given.
Importantly, these rulings relate to claiming Mortgage Interest, Rent, Rates and Contents Insurance and do NOT apply to claiming costs for electricity, telephone etc which are determined completely differently with not as strict a criteria
ATO Private Rulings
The following are some case decisions made by the Australian Taxation Office in relation to individual educators and accountants. While not binding on everyone, they give guidance as to the opinion and stance of the tax office in relation to claiming these types of expenses.
Private ATO Ruling 1
Relevant facts
You commenced a Family Day Care business.
A requirement of the Family Day Care was that you made your home safe.
You look after children in your home five days per week.
The child care children have access to the all areas of the house except for the main bedroom.
You are allowed to have up to four Day Care children.
The Day Care children sleep in the bedrooms during the day.
When other members of your family are present, including your own children, they use the same areas as the Day Care children.
Expenses you incur in respect of the home include interest, rates, water and insurance.
You estimate that the floor space that the Day Care children have access to is 80%.
You wish to claim 80% X 5/7 days per week for 50 weeks per year. This totals 54.94%.
You do not have signage to identify your house as a business.
Ruling
Entitled to Claim = No
Private ATO Ruling 2
Relevant facts
You commenced a fulltime business and have no other employment.
You are registered with your local council.
You estimate that X% of your house is used for your business. You also use home appliances in your business.
You do not have signage to identify your house as a business.
You reside in the residence with your spouse and child.
You care for less than 10 children from morning until night daily, except weekends.
You incur rental expenses while occupying the house.
Ruling
Entitled to Claim = No
Private ATO Ruling 3
Relevant facts
You use your house as a family day care centre from Monday to Friday from approximately 8am to 5pm.
The total area of your home is X square metres and of this more than half the area is used partly for the children and Y square metres is exclusively used as a sleeping area for the children.
Your business started in the year ended 30 June 2001 with gross income for the nine months ended 30 June 2001 being $Z.
Ruling
Entitled to Claim = Yes
Taxation Ruling No. IT 2673
Many other income producing activities may be conducted, in whole or in part, from a dwelling.
To take some examples, each of the following activities may be undertaken for reward, namely, children may be cared for by a day care giver, music or swimming lessons may be given, tutoring or other tuition may be given, and car or television repair services may be provided. In other cases, professional people and self-employed persons might undertake income producing activities from a study or other room of a principal residence merely because it is inconvenient for the work to be done at their normal place of work. The dwelling in each of these instances would only be regarded as being used for the purpose of gaining or producing assessable income where that part of the dwelling used for these activities has the character of a place of business.
Whether a dwelling, or part of it, has the character of a place of business is a question of fact that turns on the particular circumstances of each case but the broad test to be applied is whether a particular part of the dwelling:
is set aside exclusively as a place of business;
is clearly identifiable as a place of business; and
is not readily suitable or adaptable for use for private or domestic purposes in association with the dwelling generally.
These factors will generally also entitle the taxpayer to claim income tax deductions for interest,
rent, rates and insurance premiums paid in respect of the dwelling and the land on which it stands (see Taxation Rulings IT 140 (paragraphs 9 and 10), IT 191 (paragraph 5) and IT 194 (paragraph 7)). As a rule of thumb, it can be expected that where a person is entitled to claim a deduction for these expenses, subsection 160ZZQ(21) will apply. This will not be the case, however, where a person merely incurs additional expenses by performing work at home occasioned by the nature of the person's occupation, profession or calling and the only deductions allowable to the person are for lighting and heating expenses and depreciation (see Taxation Rulings IT 126 (paragraph 9) and IT 140 (paragraphs 11 to 16)).
12. The test would NOT be satisfied, for example, where music lessons are provided or tuition is given from a study in a home, nor if an insurance agent uses a study in his or her residence for personal and family purposes but also uses it to interview prospective clients and to store business papers. Nor would the test be satisfied in the common family daycare giver situation where, within limits, children who are being cared for are treated more or less as members of the care giver's family.
