Tax tips for home-based businesses in Australia
Did you know you can claim for cleaning costs and wear-and-tear on your furniture at your home business? Xero Australia Managing Director Chris Ridd explains what you can and can’t deduct.
As the name suggests, a home-based business is one where you operate the business at the home or from the home.
That said, you don’t have to do your work at home to be a home-based business. For instance, a house painter would do most of their work elsewhere, but if they didn’t rent or own other premises other than the home, then that would count as a home-based business as well.
Generally speaking, a home-based business can claim all of the deductions that any other SME can; yet there are also some specific deductions you should be aware of.
There are broadly two types of expenses you can claim related to your home business area: occupancy expenses and operating expenses.
Parts of the home you use for business
Occupancy expenses include rent or mortgage interest, council rates, land taxes and home insurance premiums.
Before you can claim occupancy expenses, you have to pass the Australian Tax Office’s interest deductibility test. This means you must have an area of your home set aside exclusively for your business activities, such as an office or workshop. When assessing this test, the ATO will consider factors including whether you have a sign identifying your business at the front of your house; whether or not the business area is also suitable for domestic purposes; and whether it is used regularly for client visits.
If you pass the test you can claim the proportion of your home mortgage or rent which corresponds to the amount of space you use for your business.
For instance, if the floor area of your home office or workshop is 15 percent of the total area of your home, you could claim 15 percent of your rent or mortgage interest, council rates and insurance.
Deducting part of the home mortgage sounds great, however there’s a potential sting in the tail you need to be aware of. You might have to pay capital gains tax on the sale of your home if you pass the interest deductibility test. This can apply if you ran a small business from home, even if you never claimed – the issue is how much you transformed your home into a place of business.
Operating expenses: The costs of doing business
You can claim a deduction for any expenses in running your home business that are above the costs you would have incurred anyway by living in the home.
Running costs include electricity and gas costs for heating, cooling and lighting; phone and internet costs; the decline in value of equipment like chairs, bookcases and computers; as well as the decline in value in furnishings like curtains, carpets and light fittings. Cleaning costs are also deductible.
Like claiming the mortgage or rent, you can only deduct these expenses for the portion of your house that you actually use for your home business – and there are different ways of working this out.
You can calculate this figure using the floor area of your home office. For instance, if the floor area of your home office is 10 percent of the total area of your home, you can claim 10 percent of electricity costs.
This is the simplest method, but if you don’t have an area set aside for home use only, you’ll have to use another method and you must be able to show how you calculated your deductions. If you get audited, the ATO will want to see that the claim is fair and reasonable and excludes the expenses associated with normal living costs.
A good idea is to keep a diary for a four week period to demonstrate how use of your work at home office has increased your expenses, particularly with your phone bill.
Another alternative is to claim a deduction of 34 cents for every hour you work at home. This method, however, only covers heating, cooling, lighting and furniture depreciation, and you will have to work out other expenses such as phone and internet separately.
Don’t forget wear and tear
You might be able to claim a deduction for the decline in value of some of the assets that you use in your business, such as computers and other office equipment, electrical tools and motor vehicles, as well as furnishings and carpet and curtains.
As with other deductions, you can only claim the proportion for which you use these assets for business, so you should also record your business and non-business use of these assets in a four week diary.
So when it comes to doing your business tax return this year, don’t forget to claim occupancy and operating expenses that relate to your line of business.
UPDATE:The information contained in this article is general in nature and does not take into account your personal situation or you business’ circumstances. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from an accountant or other qualified professional.
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