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As we begin to embrace the new normal following the last two years of government-mandated stay-at-home directives, office closures and increasing digital and flexible modes of working, we can reflect on the impact to well-established principles of tax laws. In a recent article published in the Australian Tax Review, we extend considerations of contemplative workers and home occupancy expense claims examined previously by Dale Boccabella and Kathrin Bain. We consider what happens to related tax principles if workplaces are forced to close and employees are sent home to work due to government mandates.

The basic case presented by Boccabella and Bain

In general, well-established principles of tax law establish that occupancy expense claims arise where there is both (i) necessity (in contrast to mere convenience) in using the home office and (ii) substantial, almost exclusive use of the space. Importantly, in their examination of precedent, Boccabella and Bain found that for contemplative workers, it was all but impossible to satisfy the first criterion.

They describe contemplative workers as being those who require minimal equipment and space to complete their work or business activities. As such, they can work essentially anywhere, including within the home, cafes, or other public locations. It was concluded, therefore, that any use of the home office would necessarily be mere convenience and this category of worker will generally be unable to claim occupancy expenses under section 8-1 of the Income Tax Assessment Act 1997 (ITAA97).

The ‘messiness’ of precedent

We consider that the COVID-19 environment may enable circumstances where this premise no longer holds. In doing so, we consider the analogy presented by Justice Michael Kirby of describing the common law as an ‘unruly garden’ and whether the conditions during the height of the COVID-19 pandemic revealed:

… a unique set of circumstances operating within a common law system that lives and breathes as society alters over time, rather than being static and unmovable. Although the common law system may appear “messy, imprecise and unfocused”, the role of precedent is flexible, enabling society to respond to novel circumstances and extend existing rules as required. COVID-19 may flag a point in time where – adopting the words of Alfred Deakin – “the past can join the future, without undue collision and strife in the present”. – Morton, Curran and Hinchliffe, p.82.

As Justice Dyson Heydon noted, precedent can preserve past wisdom and experience, whilst ensuring prudence in changing law. Whilst working from home is not a novel concept, it is the unique regulatory context that the COVID-19 pandemic created.

COVID-19 as an unusual situation

It is clear we have seen a dramatic change in working patterns in Australia that have resulted in significant impacts to central business districts. The government response included mandated working from home and quarantining requirements whether infected or exposed to the virus itself. For contemplative workers, their minimal equipment and space needs mean they are well placed to have transitioned to working from home. As noted, they could already carry out their duties anywhere.

Yet COVID-19 directives took that anywhere and replaced it with only at home. Rather than seeking flexibility or making use of employer-driven policies, working from home was imposed on workers via government directives.

During the peak of COVID-19, there was no alternative but to work from home. Disobeying directives could result in reprimand or loss of employment, or even face arrest or government fines.

What constitutes necessity in these strange times?

Following Boccabella and Bain’s analysis, we do not see it as sufficient if the employer mandates a work-from-home policy or if they provide lacklustre facilities. In these instances, a multitude of locations for which the contemplative worker could work remain, including the employer’s basic workplace. We see it as critical that during the pandemic the government directives were an external driver that negated the mere convenience assertion. This follows Boccabella and Bain’s analysis of cases such as Tribunal Case 70 (1987) 18 ATR 3501; 87 ATC 500. In effect, it is an external driver preventing the employee’s ability to establish places of work other than the home.

However, aligning with Boccabella and Bain, the type of activity carried out must not be diminished nor incidental to their normal activities:

“There is a strong indication in the cases that usage of the home office must go to the central part of the taxpayer’s income activities, rather than the more incidental aspects of the activity. Hinch v FCT (a manager of two restaurants completed a lot of his paperwork from the restaurant at home) and Case 7/94 (a physician did not see patients at home but did store extensive patient records, completed practice paperwork and carried out research at home) may provide examples of this, with deductions being denied in both cases” – Boccabella and Bain, p.842.

On this basis, if the contemplative worker also has substantial and almost exclusive use of the home office, we posit that their entitlement to occupancy expense claims pursuant to section 8-1 ITAA97 may be established. We need only to reflect upon the early days of the pandemic and lockdowns, where we saw the rush for workers to purchase office equipment to facilitate new working from home arrangements, with office suppliers selling out of home office supplies, such as desks and monitors.

If this entitlement were established, not only could the contemplative worker claim running expenses that arise through the use of the space, such as electricity and decline in value of furniture and fittings, they could claim those costs unaffected by income-earning activities, such as rent or interest on mortgages.

Consequential expenses go beyond running costs

We have already seen the Australian Taxation Office (ATO) establish a “shortcut method” to claim running expenses at a rate of 80 cents per work hour, along with numerous other avenues of support. These have now come to an end as we enter a new income tax year.

We argue that because of the unique conditions that COVID-19 has created, taxpayers are likely to face further tax complexity that go beyond running expenditure that may not be adequately captured. These relate to the potential for a unique eligibility to occupancy expenses and the consequential implications for the main residence exemption.

The COVID-19 pandemic has impacted our lives in so many ways. It continues to do so. Whilst the working from home phenomena appears to be persisting, related government directives have (at least for now) dissipated. With it, perhaps this unusual proposition we posit on the entitlement to occupancy expenses for contemplative workers. After all, as we move towards a post-covid normal, the likelihood of further government directives is waning – at least in relation to this disease.

As such, we offer new insights into not so “set in stone” established tax principles as we continue our journey of disruption in a post-covid and an increasingly digital society. Society after all is what influences standards and expectations on the construction of law.

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