Home-based businesses became a necessity for many to ensure that their small business survived the impact of the Coronavirus pandemic. While some businesses have been able to return to their usual business premises, for others, continuing to operate their business from home is still required and may be an alternative to consider if you are looking at starting a new small business.
Having a home-based business offers further attractions such as:
flexibility and improved work/life balance – remember to maintain a routine is highly beneficial to organising your day and scheduling your work hours. This will help avoid distractions at home such as the kids, the dishes, and the TV pushing work aside or alternatively, working all hours of the day and night to get your business off the ground.
having a dedicated work will help with the above - section off an area in your home and dedicate it strictly to work. At the same time, designate an area of your home to be a business-free zone in order to avoid temptations to work during personal time.
not having to deal with traffic congestion and saving travel time – and you may actually get more done on both work and domestic fronts.
reduced overhead costs such as rent, utilities, transportation and parking.
One key consideration (and benefit) is that if you are operating a home-based business, you are able to claim a number of additional expenses. To ensure you get the best tax result it is important to know how to claim everything that you’re entitled to as you can potentially reduce the amount of tax that you are liable to pay.
The types of expenses you can claim from operating your business from home depends on how you operate your business and on the structure of your business.
Sole Traders/Partnership
Claim running expenses and potentially occupancy expenses
There are two main types of expenses you can claim from operating your business from home - occupancy expenses and running expenses.
Most businesses should be able to claim running costs, but not all will be able to claim both.
Running Expenses
Running expenses are the increased costs from using your homes’ facilities and amenities. These can be claimed even if the area you use for running your business doesn’t have the character of a ‘place of business’, such as with the use of a separate study or a desk in a lounge room.
Running costs include:
Electricity and gas, for heating/cooling, lighting
Cleaning costs
Landline phone and internet for business calls and usage
Decline in value and cost of repairs to business furniture and equipment eg computers, printers, chairs, desks, bookcases
Costs can be claimed under the three different methods being:
Fixed rate method - 52 cents an hour for each hour that you operate your business from home – based on either your actual hours or a four-week representative pattern of use for:
Electricity and gas, for heating/cooling, lighting
Cleaning costs
Decline in value and cost of repairs to home office furniture and fittings
Shortcut rate method - 80 cents an hour for each hour (1 March 2020 to 30 June 2021) for all additional running costs
Actual costs method - based on portion of business use: either actual hours worked, floor area of home office compared to total floor area of home or a four-week representative pattern of use.
electricity and gas, for heating/cooling, lighting
decline in value and cost of repairs to home office furniture and fittings
phone expenses
internet expenses
cleaning costs
computer consumables and stationery – ink
decline in value of equipment – phones, computers and laptops.
Occupancy Expenses
Occupancy costs can only be claimed if you pass what is referred to by the ATO as the ‘interest deductibility test ie if the area you set up in your home-based business has the character of a ‘place of business’, so is:
clearly identifiable as a business eg a sign displayed
set aside exclusively or almost exclusively for carrying on the business
not easily adaptable for private use
used regularly for visits by your clients
Occupancy expenses are the expenses that you pay to own or rent your home, including:
mortgage interest or rent
land taxes
council and water rates
house and contents insurance
repairs and maintenance
Depending on the space/structure being used in business, you may also be able to claim the 2.5% building write-off.
The amount claimed for occupancy expenses is calculated as a percentage of the floor area (in metres squared) of the house, garage, and land that is used exclusively for business purposes, taking into account the number of days during the year used for business.
Company/Trust
Your company/trust can claim a deduction for genuine market rate rent paid to you, the property owner eg for use of an office or consulting room, shed or workshop. The amount charged must be consistent with what it would cost the business to lease a similar office or space. The arrangement should be documented by a rental contract or agreement, which also sets out the costs that the business pays for eg commercial leases often include payment of a portion of utilities, council and water rates, body corporate fees and insurance.
Rental income that you receive from your company or trust must be reported in your personal income tax return. You can claim a deduction for expenses associated with earning that income eg portion of home loan interest, repairs and maintenance, depreciation and/or 2.5% building write-off.
Your business may be subject to fringe benefits tax (FBT) if it pays or reimburses expenses of an employee eg mortgage payments or rent. While there may exemptions and concessions available to reduce your FBT liability, care must be taken and you may need to keep additional records for FBT purposes.
Note, for all home-based business expenses claimed:
To get the best tax results, when running your business from home is to document everything. That means, make sure you should keep all receipts and tax invoices. Even though they may seem insignificant, together they may just add up to help you deduct a substantial amount from your gross income and thereby significantly reduce the amount of tax that you are liable to pay. You must keep records for at least five years to show that your business incurred the expenses and how you calculated your claim.
If you are entitled to goods and services tax (GST) input tax credits, you must claim your deduction in your income tax return at the GST exclusive amount.
You should keep all the records relating to your home so that if circumstances change (you start to rent it out for example) you don't pay more tax than necessary.
If you earn personal services income (PSI), you may not be able to deduct some occupancy expenses eg rent, mortgage interest, rates or land tax for your home (or your associate’s home). That is because the PSI rules, which aim to treat individuals earning income from their personal exertion the same way that an employed individual would be treated, ie in the hands of the individual deriving it, limits these types of deductions.
Your family home is generally exempt from capital gains tax under the main residence exemption. Carrying on a home business either by claiming occupancy costs of your business or renting part of your home to your company/trust, that portion of the home attributable to the business activity will be subject to Capital Gains Tax (CGT) if you sell your home in the future. Note, however you may able to apply the small business CGT concessions to the sale, which should generally reduce any CGT liability to nil.
Motor Vehicle Expenses for a Home-Based Business
With your business based at home, costs can be claimed for travel between your home (as the base of your business) and other places of travel if the trip is for business purposes. This includes:
trips to visit a client
trips to purchase equipment or supplies
trips to a post office to mail out invoices or get mail from a P.O. Box
trips to see your business tax agent
Expenses that be claimed include:
fuel and oil
repairs and servicing
interest on a motor vehicle loan
lease payments
insurance cover premiums
registration
depreciation (decline in value).
Methods to claim motor vehicle expenses include the cents per kilometre method or the logbook method. For most businesses, the logbook method vehicle expenses will result in the biggest deduction. A logbook will need to be kept to record the details of your business trips and prove the business-related portion of expenses that can be claimed.
A logbook must be kept for a 12-week period and is valid for five years. The logbook must record the motor vehicle’s odometer readings at the start and end of the logbook period, for each trip as well, kilometres and the purpose of each trip.
You must have written evidence of all receipts and keep a record of your opening and closing odometer readings each year.
While you can purchase a logbook from your local newsagent, the pen and paper method can be inaccurate and incredibly tedious, precisely why some people don’t even bother doing it and missing out on eligible tax deductions.
We recommend instead using a digital logbook which can be installed as an app on your phone or tablet. The ATO has a free tool included in the myDeductions app but there are other options including GOFAR, TripLog (which also links to your Xero file), Driversnote, DriverDirect and Vehicle Logger.
We recommend looking for an app that offers automation with GPS tracking (starts and stops tracking your trips, as you drive), Cloud Sync (iCloud, Dropbox) to keep a backup of your logbook, the ability to easily trip data to excel, CSV or PDF.
To see how the advice in this article could apply to your situation, contact HelloLedger on:
📱 0490 033 038
🌐 www.helloledger.com.au
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