At the end of the financial year many business owners scramble to ensure they are maximising their deductions and therefore minimising the tax they have to pay.
These days, it is common for business owners to operate from home to save costs, but they often overlook the biggest tax deduction available to them – the cost of running a home office!
There are two types of home based businesses:
1. A business that is run at home – You do most of your work from home and clients also visit you at your home, e.g. an accountant;
OR
2. A business that is run from home – You perform most of your services at clients’ sites, but administer your business from home and do not have an alternate business site, e.g. a plumber.
No matter what type you fall into, or if you simply have a home office that you use when you bring work home, you may be able to claim a portion of the running costs.
Home based business running costs usually include two different categories:
a) Occupancy costs, such as:
- rent/interest on your mortgage
- council rates
- water rates
- insurance premiums
b) Running costs, such as:
- electricity
- gas
- telephone
- depreciation on office furniture and home furnishings
- cleaning
- repair
- internet access
- stationery
Typically, when you have an area or room that is specifically used for running your business, you calculate the percentage of floor space that the room occupies of the house. You then use this percentage to claim a portion of the above home expenses as a tax deduction.
If you do not have an area that is used exclusively for business, you need to find an alternative way to measure what portion of your home expenses you can claim as business costs. The most common way to do this is to compare your costs prior to commencing business with your costs after commencing business, and identify what increases are as a result of running your business from home. Other alternatives may include keeping a diary or using the ATO’s predetermined annual rate, which is currently $0.26/hour of work performed.
But what about capital gains tax?
Many business owners are led to believe that if they don’t claim any of the occupancy or running costs in their home business, then they will not have to pay any capital gains tax. Unfortunately for those business owners, that is not the case.
A capital gain arises when you sell an asset, e.g. your home, for a greater amount than you purchased it for. Capital gains tax is therefore the tax on this gain. Normally, your home is exempt from capital gains tax. However, if you are running a business either at or from home, you may have to pay capital gains tax on a portion of the gain.
There are a number of specific exemptions from capital gains tax, or small business CGT concessions, that may apply which can help to minimise or eliminate any potential tax liability. You should ask your Accountant for tax advice specific to your personal situation. However, be wary if you get the old, ‘if you don’t claim the costs in your tax return you won’t have to pay capital gains tax’ answer, and consider getting a second opinion.
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