Home Based Business? – the tax implications of a business run from home

Do you keep a diary?

No, we won’t read it but the ATO might like to.

As bookkeepers we help our clients keep good records. So sometimes we need to treat ourselves as a client and look at our business dispassionately, check we are keeping our own records well. A Diary can be a great resource for our business, it keeps our clients details, our appointments and if we have a home based business then it can track our business usage pattern and gives us vital records for claiming expenses.

When we start in business we often work from home, there are many valid reasons including financial and personal for that choice. As in all business decisions we make, it is valid to review them often as our business grows and changes. Does working from home still gives us the best financial opportunity & flexibility for our business? Does our current business structure still suit our business? What are the Tax implications for our home being our ‘Principal Place of Business’?

HOME-BASED BUSINESS

So we must first examine what is a ‘home based business’.

  1. A home-based business is where you operate the business mostly from home, generating your income from activities completed there. A portion of the home is clearly identifiable as a ‘place of business’ and is used almost exclusively for carrying on a business and includes clients visiting.
  2. You don’t have any other office other than your home e.g. a bookkeeper, without any office, who only works at client’s premises.

Generally you can claim similar expenses to any other business. However there are specific expenses associated with carrying on a ‘home based business’.

Expenses covering the area of your home defined ‘for business’ and motor vehicle expenses from your home to business locations.

Expenses relating to the Home Business Area are broken up into two broad categories: Occupancy & Running Expenses

OCCUPANCY expenses relating to ownership or use of a home, these include: rates, rent, mortgage interest, insurance. Before you are entitled to claim occupancy expenses there is an ‘Interest Deductibility Test’ you need to review: A portion of the home is clearly identifiable as a ‘place of business’ and is used almost exclusively for carrying on a business and includes clients visiting & is generally unsuitable for a domestic purpose. Satisfying this test also has another issue attached to it – Capital Gains – when selling your home CGT will become an issue for you – even if you have not previously claimed interest on your mortgage as an expense. This is an issue you need to talk to your accountant about – don’t wait till you want to sell your house!

RUNNING expenses are the increased costs relating to the use of facilities within the home. If you are eligible to claim running expenses only, you will not incur CGT if you sell your home. Running Expenses include: electricity for heating/cooling, business phone, cleaning cost, depreciation, leasing charges & cost of repairs on items of furniture and furnishing Running Expenses can be claimed:

CAPITAL GAINS TAX (CGT)

So now we come to the questions of Capital Gains Tax. Please consider the following in making your assessment and obtaining specific advice:

CGT does not apply if:

  • You operate your business from a rented home
  • You bought your home before 10 Sept 1985
  • You do not have an area specifically set aside for your business activities’

CGT may apply if:

  • You bought your home on or after 20 sept 1985
  • You used part of your home to produce business income at some time while you owned it
  • You were entitled to claim a deduction for interest you paid on your mortgage

CGT may apply even if any of the following applies:

  • You do not claim deductions for occupancy or running costs
  • You have never claimed a deduction for interest
  • You owned your home outright before you started using any part to produce an income
  • You started a business from home but have not yet made a profit.

You may want to record milestones in your diary so you and your tax adviser can establish a clear or notional start date for your business.

As we advise our clients – remember to take your own advice and keep good records for your business. Discuss your plans with your accountant, regularly.

‘A Guide for a Home Based Business’ ATO document NAT10709-07.2010 has great information and examples; I strongly recommend you get this document. (Click here for your copy)

Tax basics for small business NAT 1908 -08.2010

Subscribe to our mailing list