This information sheet aims to provide a brief overview of deductions available to small business owners who use their homes as a principal place of business.
Key Points
- The types of expenses you can claim depend on how you operate your business out of your income.
- You are only entitled to claim deductions for the portion of your expenses that relate to running your business.
- You are required to keep records for at least five years to show that your business incurred the expenses and how you calculated your claim.
- If you sell your home, there may be Capital Gains Tax (“CGT”) implications.
- If you do some work from home but it is not your principal place of business, you may still be entitled to some deductions.
Business Structure
Your business structure affects your entitlements and obligations when claiming deductions for your home-based
business expenses. 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.
There are two types of expenses for your home-based business – running expenses and occupancy expenses. Whether you can claim running expenses only, or both running and occupancy expenses, depends on whether you have an area of your home set aside as a ‘place of business’.
Running Expenses
Running expenses are the increased costs from using your home’s facilities for your business, for example:
- The costs of using a room (such as heating, cooling and lighting);
- Cleaning costs;
- Landline phone and internet costs;
- Depreciation of your business furniture and equipment; or
- Costs of repairs to your business equipment.
You can claim running expenses if you run your business from home, such as in a separate study or a desk in a lounge room, even if it does not have character of a ‘place of business’.
Calculating Your Claim
To calculate the running expenses of your home-based business, you can use one of the methods described below or any other method as long as:
- It is reasonable in your circumstances;
- You exclude your normal (private) living costs; or
- You have records to show how you calculated the business expense.
- Occupancy Expenses
- Occupancy expenses are the expenses that you pay to own or rent you home, for example:
- Mortgage interest or rent;
- Council rates;
- Land taxes; or
- House and contents insurance.
You can only claim occupancy expenses if the area of your house set aside for your business has the character of a ‘place of business’ (including if most of your business is conducted online). Indicators that the area of your home that you have set aside is a place of business include:
- Clearly identifiable as a place of business (such as a sign at the front of your house);
- Not easily suitable or adaptable for private or domestic use;
- Used exclusively or almost exclusively for your business;
- Used regularly for business visits by your clients;
- If you are eligible to claim occupancy expenses, you can also claim running expenses; or
- Occupancy expenses are usually calculated 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.
Trust and Companies
If you operate your home-based business as a trust or company, the business should have a genuine, market-rate rental contact (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 no genuine rental contract exists there may be tax implications for you and the business.
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 will be subject to Fringe Benefit Tax if it pays or reimburses you for the expenses.
Capital Gains Tax
If you were entitled to claim occupancy expenses or you own your home and receive rental income from your business, there may be CGT implications when you sell your home. The main residence exemption may not apply for the proportion of your home and the periods that you used it for your business.
Records
You are required to keep records to substantiate your claims for all of your home-based business expenses. This includes written evidence, tax invoices or receipts for:
- Purchase and repairs of furniture and equipment used for your business;
- Utility bills and cleaning expenses;
- Mortgage interest, rent, insurance and council rates (if you claim occupancy expenses);
- Rental contract between homeowner and business (if you claim occupancy expenses); or
- How you separate your business and private use (for example a diary over a representative four-week period or records of how you calculated the percentage of your floor plan dedicated to your business).
