Home Based Businesses And Home Office Expenses - May 2009

If you carry out work at home, you may be able to claim a deduction for some of the expenses relating to the area that you use for business purposes. In all cases the taxpayer needs to:

  • be able to prove that expense have been incurred and
  • be able to establish a connection between the business and the expenses being claimed.

This article clarifies the various options available and highlights a potential capital gains pitfall.
The level of deductibility depends on the nature of activities being carried out.

Home – Specific Work Area

Where a study or spare room is set aside primarily or exclusively for business activities.
Possible deductions:

  • Running expenses including heating, cooling, lighting and depreciation of furniture – Actual expenses based on floor area or 26c per hour spent in office on business activities.
  • Telephones – Itemised business usage or
  • records covering a 4 week period establishing a pattern of use for the entire year.
  • Depreciation of office plant & equipment including computers, photocopiers – Bona fide estimate of the extent that the equipment was used for income producing purposes.

Cannot claim:
Portion of rent, mortgage interest, insurance or council rates.

Home – Principal Place Of Business

You run your business from home and an area is set aside exclusively for business activities.
Possible deductions:

  • All the same deductions as above AND
  • A portion of one’s rent, mortgage interest, rates, insurance.

The most common basis used to apportion occupation costs is floor area. Other methods can be used, provided the basis is reasonable.

Do you have to pay capital gains tax when you sell your house?

If you answer yes to all of the following questions, then you have a potential capital gain exposure on the sale of your property:

  • Did you acquire your home on or after 20 September 1985?
  • Did you use any part of your home to produce business income at any time?
  • Were you entitled to an interest deduction on money borrowed to buy your home? (You need to consider this question even if there were no borrowings – i.e. you need to consider the answer as if there had been borrowings.)

You are entitled to an interest deduction where:

  • Your home has the character of a “place of business”. It is likely to have this character where your home is:
  • Clearly identifiable as a place of business; and
  • The business area is not suitable for private or domestic purposes; and
  • The area is used almost exclusively for carrying on your business; or
  • Used regularly by your clients.

Examples:

  • Trade persons work shop
  • Bookkeepers home office
  • Tutors home classroom
  • Area set aside for retail business
  • Dressmakers sewing and fitting room

Taxpayers Beware!

You still have a capital gains tax exposure on the sale of your home if you were entitled to claim a deduction for interest and didn’t actually claim the deduction!
The fact that you chose not to claim a deduction for interest on your mortgage does not exempt you from paying capital gains tax on a portion of the profit that you make on the eventual sale of your home!


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