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- On December 10, 2019
ATO has issued some new guidance to businesses claiming home office expenses for home-based businesses.
What are Home-Based Businesses?
A home-based business can be run at home like a boutique or from home like an electrician who visits the client’s site but does all the admin work from home and stores tools etc.
Home Office Expenses
Normally, if you are a self-employed person and your home is a place of business i.e. they have no other fixed place of business and they have an area in the house dedicated for income-earning activities, then one can claim occupancy expenses like interest, rates, rent etc. and running expenses like electricity, gas etc.
When it comes to PSI, you generally cannot claim occupancy expenses if PSI rules apply i.e. you do not pass the PSI tests.
ATO is reminding taxpayers that if they carry on a home-based business, they need to use the right method for claiming home office expenses depending on the business structure.
How to calculate Home office expenses?
Home office expenses can be split between Runnings expenses and Occupancy expenses.
One can use a fixed rate of 52 cents an hour for each hour that you operate your business from home – based on either your actual use or pattern of use. This covers heating, cooling, lighting, cleaning, and the decline in value of furniture and furnishings. Telephone & internet: You can calculate the business portion of your home phone and internet using an itemized account or pattern of use.
Heating & Cooling, Cleaning: If you have an area set aside for your business, you can split your heating, cooling and electricity bills based on the proportion of the floor area of your home that you use for your business and proportion of the year.
Telephone & internet: You can calculate the business portion of your home phone and internet using an itemized account or pattern of use.
Depreciation: You can use the instant asset write-off to deduct the full cost of business assets that cost less than the threshold that applied when it was first used or installed and ready for use
You can claim occupancy expenses like interest, rent, insurances etc based on the proportion of the floor area of your home that is a place of business and proportion of the year it was used for business.
To reiterate, you can claim occupancy expenses if the area of your house set aside for your business has the character of a ‘place of business.
If you operate your business as a sole trader or partnership, you can claim a deduction for the costs of running your business from home. Expenses include Occupancy expenses and running expenses.
If you operate your home-based business as a trust or company the business should have a genuine, market-rate rental contract (or similar agreement) with the owner of the property. This will determine which expenses the business pays for and can claim as a deduction. If there isn’t a genuine rental contract, there may be tax implications (explained below) for you and the business.
If there is a genuine rental contract, the property owner needs to recognize the rental income and claim expenses on a reasonable proportion. The business entity can claim the rental expenses paid as an expense.
What are the tax implications?
If you are an employee of the business and the business pays for or reimburses you for some of the costs of running your business from home, you cannot claim a deduction for the expenses in your individual income tax return. Your business may be subject to fringe benefits tax (FBT) if it pays or reimburses you for the expenses(otherwise deductible rule or minor benefits exemption may apply)
Capital gains tax issues
If the taxpayer owns the home and that home is used as a place of business i.e. it is used to derive income, it cannot be exempt from capital gains tax under the main residence exemption.
The general rule is that the main residence exemption cannot apply to the extent that the owner would have been able to claim interest deductions in relation to the property. Under the interest deductibility test, the area you have set aside in your home for your business must have the character of a place of business.
Indicators that an area of your home has the character of a place of business (para 5) includes:
- Clearly identifiable as a place of business,
- Not readily suitable or adaptable for private or domestic purposes
- Used exclusively or almost exclusively for carrying on your business
- Used regularly for visits by your clients.
What it means is that if you can claim occupancy expenses, then it will affect your ability to claim main residence exemption even if you didn’t claim any occupancy expenses.
Book a free consultation or contact us to discuss your situation.