Home is where the tax deduction is …

Many people who received termination payments last year used the fund to start home-based businesses. Now, they are facing the first year of having to claim tax deductions for their home offices.

With so many businesses now being run from home, the ATO is eager to ensure that those claiming tax deductions do so correctly.

Understanding the Rules

A home-based business is one that falls in one of two categories.

  • A business may be run at home (such as a hairdresser) where all the work is done there, with clients coming to their home.
  • A business may also be run from home. In this situation the business does most of its work on clients’ premises and does not have any other premises of its own. Tradesmen, for example, work from home.

The responsibility for keeping invoices and records for a home office is the same as that for any other business expenses you are claiming. Invoices for these expenses must be retained.

Occupancy expenses

Business owners that are conducting their business at home may be entitled to claim a portion of their rates, house insurance and mortgage interest for income tax purposes.

The amount of these deductions is generally based upon the percentage of the home area that is used for business purposes, but there are some special circumstances.

Interest costs can generally be deducted for income tax purposes where the interest costs are directly attributed to a place of business. Whilst this may depend on particular circumstances, specific indicators include that the place is clearly identifiable as a place of business; it is unsuitable for private purposes; it is used exclusively or almost exclusively as a place of business and is used regularly by clients.

Taxpayers who satisfy the interest deductibility test may have to pay capital gains tax on part of any capital gain that is made when the house is sold.

Running expenses
Running expenses are the increased costs of running facilities within a home as a result of running a business. These expenses include electricity, cooling, telephone and cleaning costs.

Taxpayers may claim the additional expenses incurred from running a business from home, however the method to work out  these additional expenses must be able to prove that the claim is reasonable and not of a personal or private nature.

Business owners of home based businesses may claim depreciation for the decline in value of depreciating assets. These include items such as computers, photocopiers, furnishings and tools. Assets used for both business and personal activities must have the deduction reduced for non-business purposes.