Expenses of Income-Earning Activities Carried on at Home

7.76. Considerable administrative difficulties have arisen under the present law in regard to expenses associated with an income-earning activity which is in some degree carried on at the taxpayer's residence. Such expenses are deductible under the general provision allowing deduction of expenses in deriving income.

7.77. The present law, though by no means settled, would appear to draw a distinction between overhead expenses, such as interest and repairs to the residence or rent, and expenses directly connected with the income-earning activity, such as light, heating and depreciation on furniture. In regard to the former, the allowance of a proportion of the overheads requires that the room in which the income-earning activity is conducted should have been used in a manner that could not be described as a domestic use: ‘A study does not cease to be part of a taxpayer's home because it is used by the taxpayer for the pursuit of activities from which he earns his income’.note If the study were to be held to change its character from domestic to non-domestic when it is used for such activities, one would have to concede that a bedroom ceases to be part of a home because the taxpayer solves his most difficult business problems in bed. The Committee is conscious of the need to draw a line that involves an objective test and is as determinate as possible. There is a distinction, it is true, between a barrister who prepares a brief for the next day in his study and a lecturer who reads the latest literature. But the barrister will on occasions read the latest literature and the lecturer may be preparing a lecture for the next day. A test in terms of the activities pursued in the room is unmanageable. The non-domestic-use test appears to the Committee to be the appropriate one.

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7.78. Under the latter test, a room devoted to an artist's studio or to a carpenter's workshop will attract a deduction for overheads. So too will a doctor's surgery. If it is thought that there might be doubt in any of these cases, the Act should expressly define non-domestic use.

7.79. In a case such as the doctor's surgery, the allowance could be justified on the ground that the room is used in a way that involves contact with the public. The Committee would, however, prefer the test to depend wholly on non-domestic use. The mere fact that a taxpayer occasionally sees patients, clients or customers at home should not attract the deduction. But where a room is set aside for such contacts, the use will clearly be non-domestic.

7.80. The observations in the last paragraph raise an issue whether exclusive non-domestic use of a room is necessary to attract the deduction. In the Committee's view a test in terms of exclusive use is appropriate. However, the Commissioner should be given a discretion to disregard minor use of the room for a domestic purpose.

7.81. Expenses more directly connected with the earning of income may, under the present law, be deductible even though no part of the home is devoted to a non-domestic use. Expenditure in providing light and heating exclusively for the taxpayer while he is engaged in work from which he derives incomes is, it seems, deductible. Depreciation on domestic furniture, carpets and curtains in a room where the taxpayer engages in work is allowed, subject to apportionment where the room is also used for other purposes. In the Committee's view these principles are unmanageable. The deductibility of expenses for light and heating and depreciation on items of ordinary domestic equipment should be determined by the same principle as applies to overheads. Deduction should be allowed only where the expenses relate to the deriving of income in a room exclusively devoted to a non-domestic use.

7.82. The deductibility of depreciation on items that are not ordinary items of domestic equipment (for example, a typewriter or a filing-cabinet or, more obviously, a lathe), the current expenses associated with such items (for example, electricity charges) and also the expenses associated with the use of a telephone should be left to the operation of the general provision unaffected by the special provisions proposed by the Committee.

7.83. The carrying out of the Committee's proposals will require some statutory amendments to displace, in regard to direct expenses, the interpretation of the general provision. The Committee suggests that the opportunity be taken not only to do this, but to establish a special code which will settle the law in this area in a form that will overcome the present uncertainties.