Home Based Business/Home Office Expenses

A home-based business is one where your home is also your principal place of business. 

That is, you run your sole trader or partnership business at or from home and have a room or space set aside exclusively for business activities.

A home-based business can be run:

• at home – that is, you do most of the work at your home. An example is a dressmaker who does all their work at home, with clients coming to their home for fittings.
  
  
• from home – that is, your business doesn't own or rent a separate premise. An example is a tiler who does all their work on clients' premises, but does all their record keeping, and stores all their tools and supplies, at home.

If your home is not your principal (or main) place of business but you do some work from home, you may still be able to claim a deduction for some of your expenses relating to the area you use.

Refer to the link below for examples.

If you are renting your home, you do not have a capital gains tax issue to deal with.

But if you own that home, you may:

> if you claim to have a room or space set aside exclusively for business activities and your business is not a company or trust.

> if you charge the entity rent or claim holding costs (e.g. mortgage interest) for the home as a tax deduction.

The two methods that are most used are:

1. Short-cut method

    

   This method is available even if you do not have a dedicated work area in your home.
   
   Under this method, you can claim 80 cents per hour for your additional running expenses from 1 March 2020 – 30 June 2021 that you have incurred.
   
   This sounds more generous than the existing method but for many people it results in a lower claim, because this covers a whole range of expenses related to doing your job:

    

• Electricity and gas expenses associated with heating, cooling, and lighting.
  
  
• Cleaning expenses, phone costs, and internet.
  
  
• Home office furniture, stationery, computers consumables, laptops, printers and tablets.

1. The existing method (fixed rate method)
   
   The method is available only if you have a dedicated work area in your home.

   
   
   This is known as the 52 cents per work hour method for claiming items such as heating, cooling, lighting, cleaning, and a decline in value of office furniture.

   
   But in addition to the above you can also claim the work-related portion of actual phone and internet expenses, stationery and a decline in the value of a computer, laptop or similar device.

    

   But you’ll need to keep records of the expenses and be clear about what the personal versus deductible work-related portion of usage is.  

    

    

    

   To make a claim on an hourly basis under 1 or 2, you will need to keep records of the number of hours you’ve worked. This could include your Outlook calendar, a timesheet or diary.

    

    

   So, to maximise the tax deduction you should calculate your claim under each method and claim the one that gives the largest tax deduction.

    

    

   What you can’t claim

    

   If you are working from home because of the COVID-19 lockdown, unfortunately you can’t claim:

    

• Occupancy expenses such as mortgage interest, rent, insurance and rates.
  
  
• Coffee, tea, milk, and other general household items.
  
  

These expenses can only be claimed by people running a business from home.

Claiming home office expenses

Individual taxpayers who claim home office expenses are required to be able to prove that they have incurred such expenses. Such taxpayers must also be able to establish a connection between the use of their home office and their work or business. A deduction is allowable only where additional running costs are incurred by a taxpayer because of income producing activities. Also, the income producing use of the home office needs to be substantial and not merely incidental.  The Commissioner's view of the law relating to home office expenses is contained in Taxation Ruling TR 93/30 - Deductions for home office expenses. (See link below)

Alternative method of claiming some expenses

Rate per hour method: Individual taxpayers who claim deductions for work- or business-related home office running expenses comprising heating, cooling, lighting, cleaning and the decline in value of office furniture may claim either a deduction for the actual expenses incurred or a deduction calculated at a fixed rate per hour.

In addition, other expenses like the work-related portion of phone and internet expenses, computer consumables, stationery, and the decline in value of a computer, laptop or similar device can also be claimed.

Calculating how many hours of office use: The Commissioner will accept diary records covering a representative four-week period as establishing a pattern of use for the entire year. 

Fixed Rate per hour

From 1 March 2020 to 30 June 2021 - 80 cents - per hour  - refer WORKING FROM HOME SHORTCUT alternative methods in link below

From 1 July 2018 to 30 June 2022 – 52 cents per hour

From 1 July 2014 to 30 June 2018 – 45 cents per hour

From 1 July 2010 to 30 June 2014 – 34 cents per hour

From 1 July 2004 to 30 June 2010 – 26 cents per hour

From 1 July 2001 to 30 June 2004 – 20 cents per hour

Generally, you can ignore a capital gain or loss you make when you sell your home.  However, you may have to pay capital gains tax (CGT) when you sell your home if you have used any part of it for business purposes. 

The liability for CGT is not removed just because you did not claim occupancy or running expenses as a tax deduction. The test is whether you were eligible to claim.

However, you may be eligible for the Small Business CGT Concessions, to reduce or eliminate your CGT liability.

CGT will not apply if any of the following apply:

> you do not have an area specifically set aside for your business activities or,

> you operate your business through a company or trust and you do not charge the company/trust rent for the use of your home. This applies even if the company lists the home address as its Principal Place of Business at ASIC.

Source: ATO