Running a business from home offers a lot of perks – flexible hours; a familiar and comfortable space; less travel; and the potential to claim some attractive tax deductions as well! Like many tax-related issues, however, there’s no one-size fits all approach to claiming deductions for your home-based business. Your eligibility for different deductions depends in part on how your business is structured and whether your home has the character of a ‘place of business’ – let’s take a look.
Sole Traders & Partnerships
For those operating a business under a sole trader or a partnership structure, there are two types of expenses for your home-based business. You may be able to claim one or both types of expenses depending on whether you have an area of your home set aside as a ‘place of business’.
Running Expenses
Running expenses may be claimed if you’re running a business from home – e.g. from a separate study or a desk elsewhere in your home. These include: electricity and gas costs for heating, cooling and lighting a room; landline phone and internet service costs for your business (mobile phone and internet costs are dealt with separately as assets or operating expenses); the decline in value and cost of repairs to plant and equipment, furniture, and furnishings.
You can use any method to calculate your running expenses, as long as it’s reasonable in your circumstances - you include only the business portion of the expenses. You must be able to demonstrate how you have calculated your business use percentage and maintain written records to support that calculation.
Alternatively, and more simply you can use a fixed rate of 52 cents an hour (this is reviewed annually) for each hour that you operate your business from home based on either your actual use of ‘pattern of use’. You can work out your ‘pattern of use’ by maintaining a diary for a four-week period that is representative of your business use.
Importantly, running expenses may be claimed even if the ‘space’ doesn’t have the character of a ‘place of business.’
Occupancy Expenses
These expenses include mortgage interest or rent; council rates; land taxes and home insurance costs and the deduction is calculated based on the area (e.g. floor space) of your home that is used for business purposes.
In order to claim occupancy expenses, the area of your house set aside for your business must have the character of a ‘place of business.’ Indicators include a sign at the front of the house; the area is used exclusively or almost exclusively for your business and is not suitable for or adaptable for private or domestic use; and the space is regularly used for visits by your clients.
To be eligible to claim a deduction for occupancy expenses you must pass the interest deductibility test, and subsequently if you are eligible to claim occupancy expenses, you will also be able to claim running expenses. Note that you may not be able to claim occupancy expenses if personal services income rules (PSI) apply to your business. You can find more information on the interest deductibility test here.
As for claiming running expenses, you must keep written records to substantiate any claims for occupancy costs including tax invoices or receipts.
On the downside, if you are entitled to claim occupancy expenses there may be Capital Gains Tax (CGT) consequences when you sell your home as the Main Residence Exemption may not apply to the portion of your home you used for your business.
The above details the available options for claiming expenses if you run your business as a sole trader or through a partnership. The rules for claiming this type of expense if you are operating via a trust or company are more complex. As always, if you need assistance in this area, please don’t hesitate to ask us for guidance.
Navigating the complex tax system in Australia can be challenging at the best of times – if you’re operating a business from your home and want to remain fully compliant whilst maximising your deductions, get in touch with McKinley Plowman today. Contact us via our website or call us on 08 9301 2200.
