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Extra tax deductions for home-based businesses

There are some types of tax deductions that are only available for home-based businesses. These are in addition to those tax deductions that are available to all types of businesses. What extra tax deductions can be claimed for home-based businesses?

What is a ‘home-based business’?

A ‘home-based business’ is one that is operated either:

  • at home – i.e. most of the business’s work is carried out at your home, or
  • from home – i.e. where the business does not own or rent any premises other than your home. This is the most common type of home-based business in the residential building industry as much of the business’ work is carried out on-site.

Which tax deductions are specific to home-based businesses?

There are three types of tax deductions that are only available to home-based businesses. They are:

  1. Occupancy expenses (relating to your home-based area)
  2. Running expenses (relating to your home-based area)
  3. Motor vehicle expenses (for certain types of travel).

Any home-based business can claim types 2 and 3 (above) if those types of expenses were incurred in the relevant tax year, but only those home-based businesses that pass the ‘interest deductibility test’ can claim type 1 (above).

Home-based business owners should also be aware that claiming occupancy expenses has Capital Gains Tax implications (whereas the other two deductions do not). If you are (or intend to) operate a home-based business and have not already done so, you should seek your own professional tax advice to confirm:

  • how your personal circumstances will be affected by the capital gains tax liability, and
  • whether there is a better way to structure your business affairs.
Step 1: Does your home-based business pass the interest deductibility test?
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Claiming this type of deduction involves a two-step process: 

A home-based business meets the ‘interest deductibility test’ if the home business area meets the following criteria: 

  • It is clearly identifiable as a place of business (e.g. signage at the front of the house)
  • It is unsuitable for private or domestic purposes
  • It is used exclusively or almost exclusively for carrying on your business, and
  • It is used regularly by your clients

If your home-based business passes this test, then: 

  • the advantage is that your home-based business can claim a percentage of occupancy expenses as a tax deduction, and
  • the disadvantage is that your home will now attract Capital Gains Tax.
Step 2: Work out how much to claim
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Occupancy expenses are those that you pay to own, rent or use your home. Examples include:

  • rent
  • mortgage interest
  • council rates, and
  • house insurance premiums.

There is no formula you have to follow to work out this percentage. A commonly used method is % floor area (that is, the proportion of the home-business area to the total area of your home). Alternatively, you can simply choose a method that is reasonable and based on accurate information.

2. Running expenses

Running expenses include:

  • the cost of using a room – for example, electricity and costs for heating, cooling and lighting
  • business phone costs
  • cleaning costs
  • the decline in value of plant and equipment – for example, chairs, bookcases, computers and
  • tools
  • the decline in value of furniture and furnishings, and
  • the cost of repair to furniture and furnishings.

A home-based business can only claim this type of expense as a tax deduction if extra costs were incurred as business activities were being carried out at home. The claimable tax deduction is only that amount which is incurred by reason of the business.

There is no formula you have to follow to work out this percentage.

A commonly used method is that outlined above. Otherwise, you can simply choose a method that:

  • is reasonable and based on accurate information, and 
  • excludes normal living costs. 

To help you, the ATO has released details of different methods that are acceptable to them. They are:

  • to record actual use of the business home area: by keeping a diary
  • for electricity and gas costs: claiming 26 cents per hour, and
  • for phone costs: if you do not use a phone exclusively for business then you can claim a percentage by using the following formula: [Number of business calls made and received] x 100 / [Number of total calls made and received]. 

3. Travelling expenses (for certain types of travel) 

The general rule about travelling expenses

The general rule (for all business owners) is that the cost of trips between home and work cannot be claimed as a tax deduction. 

The exception for home-based businesses 

The owner of a home-based business lives at the place where s/he works, thus any business-related travel can be claimed as a tax deduction. 

Examples include travelling to: 

  • a client’s premises (if you are working there or delivering some documents) 
  • purchase equipment or supplies 
  • do your banking 
  • the post office to post invoices, or 
  • meet your tax adviser. 

Getting further information from the ATO 

You can access (for free) any of the following ATO publications (which are easy to understand and contain practical examples): 

Name of ATO publication Reference number
Guide for home-based business operators – Home-based business NAT 10709-05.2009
Income Tax: deductions for home office expenses TR 93/30
Home office expenses PS LA 2001/6
Tax Basics for Small Businesses NAT 1908

You can

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