More and more people are trying to improve their work and life balance, which has led to a significant increase in home-based businesses starting up over the last few years. Business owners often ask, “What home expenses can I claim?” Unfortunately, this is a very open ended question with a multitude of factors that need to be considered. The Australian Taxation Office (ATO) has set the basic tests and requirements for claiming two types of house expenses for home-based businesses:

• Occupancy costs such as council rates, house insurance, rent and mortgage interest; and
• Running costs such as electricity, gas, phone.

To be eligible to claim occupancy costs, the house must be clearly identifiable as your place of business and include an area allocated specifically for your business. Evidence of this includes business signage, a unique access for customers or clients and an area of the house devoted to the business – which has little impact on your private home life.

Many home-based businesses will not meet these criteria, for example, a tradesperson who does the majority of their work on site would most likely fail this test in the eyes of the ATO.

However, a music teacher would have a stronger argument if they had a separate room filled with musical equipment and a separate access for clients who visit the premises for lessons.

By comparison, it is easier to claim running costs. All that needs to be proven is that you have an office in your home that you utilise for business purposes. For example, the tradesperson mentioned above would be eligible to claim running costs for the operation of an office used in preparing invoices, quotes and for research and planning. The main issue with this test is the extent to which these costs can be claimed, with a percentage usually chosen depending on the extent of business use which can be justified.

Costs such as office furniture (i.e. desks and filing cabinets) and stationery are considered costs of running a home office and can be claimed, again depending on the size and nature of the home-based business. Repairs or structural improvements can generally only be claimed if you meet the occupancy tests.

Passing the occupancy test and being able to claim your mortgage interest and rates as a tax deduction provides a tax benefit for small business owners. However, it does have a costly flip side which should be considered. Once the home becomes more than just your main residence there is the high possibility that it will be caught up in the Capital Gains Tax (CGT) system.

While there is a general CGT exemption that applies for main residences, this exemption is lost to the extent that the home is used as a place of business. Usually the percentage that is claimed of the occupancy costs is the percentage of CGT that must be paid whilst the business was being operated.

For example, if your office space makes up five per cent of the total floor area of the home, AND you meet the occupancy tests, you can then claim five per cent of the mortgage interest. However, when you sell the property five per cent of the gain made will then become taxable income.

In these circumstances you need to weigh up the short and long term benefits of making these claims. For borderline cases, it sometimes doesn’t warrant making a tax deductible claim for the occupancy costs.

If you are clearly operating a business from your home, not claiming these costs will not ensure you are exempt from CGT. The ATO will deem you are running a business from your home even if you do not claim occupancy costs if the facts dictate this. In these cases, businesses should claim the occupancy costs to ensure they get the immediate tax benefits.

All home-based businesses vary in some form, as do the premises used for these businesses, so there is no ‘one size fits all’ scenario.

As a business owner you should consider your own personal circumstances and discuss them in depth with your accountant to ensure the best tax result is achieved.

Article was published in the winter/spring edition of ‘Working Women’ magazine to read other great articles please visit http://www.womensnetwork.com.au