If your home is also your place of business, you can claim income tax deductions for a portion of the costs of owning, maintaining and using your home for this purpose. When you sell your home you may be liable for capital gains tax.
Your home is your place of business if you run your business from home, and a room is set aside exclusively for your business activities. Examples of a place of business include:
- A small business operator whose main office is in their home
- A tradesperson or craftsperson who has their workshop at home
- A Doctor or dentist who has their surgery or consulting room at home.
Deductions you can claim
If you run your business from home, you may be able to claim the following expenses:
- Utility costs – The cost of using a room’s utilities, such as gas and electricity – these should be apportioned according to actual usage.
- Business phone costs – if you used a telephone exclusively for business. You can claim for the rental and calls, but not the installation costs. If you used the telephone for both business and private calls, you can claim a deduction for business calls.
- Decline in value (depreciation) of office plant and equipment (for example, desks, chairs and computers). If you also used the equipment for private purposes, your claim must be apportioned.
- Decline in value of curtains, carpets and light fittings.
- Occupancy expenses – your costs of owning or renting the house (such as rent, mortgage interest, insurance and rates). You can claim the portion of these costs that relates to the room or workshop you use as a place of business. A common method of working out how much to claim is the floor area (as a proportion of the floor area in your whole home).
- If your income includes personal services income (PSI), you may not be able to claim a deduction for occupancy expenses – see Personal services income (PSI).
If you have a place where you conduct business elsewhere – such as a factory, shop or office – generally your home will not be considered a place of business, and you can’t claim occupancy expenses.
Capital gains and the main residence exemption
Generally, when you sell your home or main residence, you can ignore a capital gain or loss you make. This is called the ‘main residence exemption’.
If your home is your place of business, you generally can’t obtain the full main residence exemption. However, you are probably entitled to a partial exemption.
To determine how much of the capital gain is not exempt, you generally need to work out the following:
- The proportion of floor area of your home that is set aside to produce income
- The period of time you used it for this purpose.
If you first used your home to produce income after 20 August 1996, the period before this 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 it was first used to produce income.
It’s a good idea to get a valuation of your home at the time you first use it as your place of business, so when you come to sell your home you don’t pay more capital gains tax than necessary.
Running a business can be difficult enough without having to worry about your bookkeeping and taxes call Taxwise Australia to find out about the different packages they offer for small businesses.
