Home office occupancy expenses after Hall: is it time to rethink the essential character test?

On 10 April 2026, the Full Federal Court (Thawley, McElwaine and Wheatley JJ) handed down Commissioner of Taxation v Hall [2026] FCAFC 43, unanimously holding that an employee cannot deduct occupancy expenses (such as rent, mortgage interest, rates, insurance) for a dedicated home office, even where the employee was compelled to work from home and the room was used exclusively for work.

The law after Hall

Briefly, Mr Hall was a sports presenter employed by the ABC in Melbourne during the 2021 income year. COVID-19 restrictions required him to work from home. His Digital Role (75 per cent of his work) was performed exclusively from the second bedroom of a rented apartment. He claimed a deduction for a proportion of rent attributable to that room.

The commissioner denied it. The tribunal allowed it. The Full Court reversed the tribunal.

Section 8-1 of the Income Tax Assessment Act 1997 (Cth) operates through two cumulative limbs. The positive limb (s 8-1(1)) permits a deduction for an outgoing incurred in gaining assessable income. The negative limb (s 8-1(2)(b)) excludes any outgoing of a private or domestic nature. As the High Court held in John v Commissioner of Taxation [1989] HCA 5; 166 CLR 417 at 431, there is no "necessary antipathy" between the two such that an outgoing can satisfy the positive limb and still be excluded by the negative limb.

The character inquiry was settled in Commissioner of Taxation v Faichney [1972] HCA 67, Handley v Commissioner of Taxation [1981] HCA 16, and Commissioner of Taxation v Forsyth [1981] HCA 15. A study in a home, "no matter how great the extent of its dedication in point of use" to income-producing activities, remains part of the home (Faichney at 43). The inquiry looks to what the expenditure secures, domestic accommodation, not how the space is used. Wilson J in Forsyth held that the Court below had "abandoned the 'essential character' test in favour of the 'use' criterion" (at 216-217).

Many practitioners had relied on Swinford v Commissioner of Taxation [1984] 3 NSWLR 118 and Commissioner of Taxation v Brixius [1987] FCA 612 to support occupancy claims. The Full Court cast significant doubt on that line of authority, observing that the reasoning "is not easily reconciled with the High Court's decisions in Faichney, Handley and Forsyth" [68].

Compulsion was held irrelevant: the fact that a taxpayer is obliged to incur expenditure "will not convert private expenditure into deductible expenditure" (Commissioner of Taxation v Cooper [1991] FCA 190 at 201).

The car expense claim was also dismissed: the Digital and Live Roles were "quite distinct" activities, making the commute travel "to" work, not "in" performing it [95]-[96].

The question Hall leaves open

At [73], the Full Court made a telling observation: a "use" test "could have prevailed" over the essential character test, and other jurisdictions have adopted it. But it has not prevailed here. The position "can only be altered by the High Court revisiting the relevant conclusions in Faichney, Handley, Forsyth, John and Anstis."

That, respectfully, in my view, is not a ringing endorsement. It is a statement that the Full Court's hands are tied.

Parsons and the case for a different approach

The Full Court devoted considerable attention to the criticism of the essential character test by Professor Ross Parsons in Income Taxation in Australia (Law Book Co, 1985) at [8.28] to [8.37]. Parsons considered that once an outgoing is shown to be, to a certain extent, incurred in gaining assessable income, it is artificial to treat that same outgoing, to the same extent, as retaining a private or domestic character. The essential character approach, in his view, converts what should be a quantitative inquiry (i.e., the extent of income-producing use) into a categorical exclusion [34].

Parsons argued that the majority in Handley and Forsyth had deployed the essential character test incorrectly. Lunney v Commissioner of Taxation [1958] HCA 5, the source of the test, used "essential character" to assess relevance under the positive limb, not to deny deductibility of an expense that was otherwise relevant [36]. If otherwise relevant, interest, rent and rates relating to a home study are as much incurred "in" gaining income as the same expenses relating to factory premises [37].

He preferred an objective use-based approach directed to whether the accommodation had been converted to "business premises" evidenced by adaptation, the nature of the work, or regular receipt of clients [38]. He adopted Stephen J's warning in Handley that the operation of the provision should not depend on the "vagaries of architecture".

The Full Court acknowledged these criticisms but held that Parsons' views "have not prevailed". After his work was published, the High Court confirmed in John that the negative limb operates as a true exception, not by way of contradistinction [35]. That is binding. But being binding does not mean it is fair (or appropriate).

Is it fair?

Consider the practical reality. An employee in a capital city rents a two-bedroom apartment because their employer requires them to work from home. They have no other premises. The second bedroom is used exclusively as an office. The additional rent is incurred solely because of the work requirement. And yet the law says that rent is private because the apartment is a home.

Compare that with a taxpayer who uses part of the home as a place of business. A doctor's surgery, for example, which Mason J in Faichney distinguished as “not in a relevant sense part of his home; it is his place of business” (at 44). Where premises have that character, the essential character of the occupancy expense may not be private or domestic. The distinction turns on characterisation of the premises, not the economic substance of the expenditure. Two taxpayers may each incur additional rent for a room used exclusively for work. Whether one obtains a deduction and the other does not depends on whether the room is properly characterised as a place of business or as part of a home.

The essential character test was formulated when working from home was the exception; for example, a professional might maintain a study for occasional after-hours work, but the primary workplace was elsewhere. That factual assumption no longer holds. The pandemic permanently changed working patterns. Many Australians now work from home without an alternative workplace. For these taxpayers, the home office is not a convenience. It is the workplace. Respectfully, in my view, the law has not kept up.

The Full Court's observation that the "use" test could have prevailed and that only the High Court can change this reads as an invitation. Whether the High Court accepts it or whether parliament intervenes is uncertain. What is certain is that the essential character test, as applied to occupancy expenses in a post-pandemic economy, produces results that are difficult to justify on policy grounds.

What practitioners should do now

Employee claims for occupancy expenses are not sustainable following Hall. Positions based on Brixius should be reconsidered. Running expenses such as electricity, heating, internet, phone and depreciation of office furniture continue to be covered by PCG 2023/1 (67 cents per hour before 1 July 2024, 70 cents per hour from 1 July 2024) and remain deductible. The distinction between occupancy and running expenses, between what secures the premises and what is consumed in the course of work, is the line that practitioners must draw with precision.

Conclusion

Hall settles the law. It does not settle the policy. Parsons argued four decades ago that the essential character approach was artificial. The Full Court has acknowledged that a different approach could have prevailed. Whether the High Court or parliament will revisit this question in light of how Australians now work (in my view) should be a matter of when and not if.

Case citation: Commissioner of Taxation v Hall [2026] FCAFC 43

General information only. Not legal or tax advice.