Many small businesses use the family home as a base for business. The complexities of what can be claimed versus what is not a deduction can be confusing. Today we have put together a general guide on the issue.
There is no formula as to how to claim home based business expenses. But there are some considerations that need to be considered. Here is a simple guide to what matters.
Step One – Are you in business?
If the answer is no, you will almost certainly be denied a deduction. The premise that the ATO rely on is that if you are employed you are almost always provided with a place of employment and working from home is a mere convenience.
Step Two – Do you have an office or warehouse?
If the answer is yes you face the same situation as in Step One
Step Three – Do you own your own home or are you renting?
It must be remembered that owning your own home and claiming deductions can potentially and partially remove the Capital Gains Tax-free status of the family home. You may be able to claim some electricity and Internet costs, but other costs such as mortgage interest, rates, insurance etc. have significant ramifications. These types of expenses can be claimed, but our starting point is don’t do it and then look at reasons why you would proceed.
Renting does provide the perfect opportunity to claim deductions.
Step Four – Do you have an area that is set aside exclusively for work?
A general rule of thumb is that shared areas do not comprise a deductible option. These typically include living rooms, kitchens, bathrooms etc. A bedroom that is used exclusively as an office, a shed that is used exclusively to store tools and materials or a garage that is used exclusively to store work vehicles are examples of what is deductible.
Step Five – The calculation
All of the relevant data is collected (area under roof, exclusive work areas, rent) and a calculation is made as to how much the deduction will be and that documents the claim.
Points to remember
The calculation and deductibility should be revisited every year and is subject to the material change rules (Have you moved? Do you now rent an office?).
If you operate via a company or trust there should be a formal agreement.
Click here for an ATO guide on the subject.
Always remember that we are available for guidance and advice on this and all other matters of taxation.