In last month’s column I explained the deductions available to you if you have a separate place of employment but also spend time working at home attending to matters relating to your employment by utilizing a home office or designated work area.

This month the discussion will be expanded to address the tax implications of operating a business from your home where further tax deductions may be available in addition to the running costs covered last month in Part A of this tri-part series.

The Commissioner of Taxation has defined a home-based business as one where your home is also your principal place of business and can be run;

  • At home – meaning you do most of the work at your home for example, a dressmaker, photographer, hairdresser, artist.
  • From home – as your business doesn’t own or rent a separate premises, for example a tradesman who does all or most of his work on the client’s premises but does all of the business record keeping at home and stores all of his tools, equipment, materials and supplies at home.

Claimable home-based business expenses fall into the following categories:
1) Running expenses such as gas, electricity, phone, internet, cleaning and depreciation of plant and equipment – refer last month’s column.

2) Motor vehicle expenses for trips between your home and other destinations provided the travel is for business purposes.

3) Occupancy expenses which you pay to own, rent or use your home include:

  • Mortgage interest or rent
  • Council rates
  • House insurance premiums
  • Land tax

Tests for claiming occupancy expenses

1) To be eligible to claim a deduction for occupancy expenses, your business must pass the interest deductibility test which requires the area set aside in your home for operating your business to have the character of a place of business.

Indicators of a place of business include:

  • Clearly identified as a place of business such as signage, area for client parking etc.
  • The business usage area is not readily suitable or adaptable for private or domestic usage
  • The area is exclusively or almost exclusively for carrying on your business
  • The area is used regularly for business visits by clients

2) If the personal services income rules apply to your business you may not be able to claim occupancy expenses, so check with your tax agent or accountant if in doubt.

Determining the amount of occupancy expenses to claim

The most common method for working out how much to claim is to measure the floor area utilized by your business and express it as a percentage of the total floor area of your home or your home plus the business area if it is detached from your home.

If your business passes the interest deductibility test, you may have a partial exposure to capital gains tax if your place of business is also your main residence. The percentage of your exposure will be based upon:

  • the percentage of floor area used by the business, and
  • the percentage of time your home was used as a place of business

If you first used your home as your place of business after 20 August 1996, the period before you first used your home to produce income is not taken into account in working out the amount of any capital gain or loss. Instead, you use the market value of your home at the time you first used it to produce income.

Tax Tips

1) It would be a good idea to get a valuation of your home at the time you first use it as your place of business, so that when you come to sell your home you don’t pay more capital gains tax than necessary.

2) Your exposure to capital gains tax when you run a business from home depends upon whether or not you pass the interest deductibility test and applies even if you didn’t have a mortgage or didn’t claim interest as an occupancy expense.

3) If you are likely to have an exposure to capital gains tax it makes sense to ensure you claim all of the occupancy expense deductions available to you each year.

The content of this article is not intended to be used as professional advice and should not be used as such.
Brian Spurrell FCPA, CTA, Registered Tax Agent, is Director of Personalised Taxation & Accounting Services Pty Ltd. PO Box 143 Warrandyte 3113. Mobile: 0412 011 946,
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