The ATO usually views expenses associated with a person’s home as those of a private nature. But if you produce your income at home, or some of it, and incur expenses from using your home as your “office” or “workshop”, you will generally be able to claim certain deductions as expenses.
Tax deductions are available from the use of your home to earn income in two circumstances. First, if your home is used in connection with your income earning activities but isn’t a place of business (that is, your home is not your principal place of business, but you might do a few hours of work there). The second situation in which you can claim a tax deduction is when the home is being used as a place of business. The tax implications are different depending on which of these circumstances applies.
In broad terms, expenses fall into the following categories — running expenses, occupancy expenses, and depreciation on equipment.
You can generally view running expenses as those costs that result from you using facilities in your home to help run the business or home office, so these would include electricity, gas, phone bills and perhaps cleaning costs. But again you can only claim a deduction for the amount of usage from the business or home office, not general household expenses.
Using your floor area may be an appropriate way of working out some running expenses. If the floor area of your home office or workshop is 10% of the total area of your home, you can claim 10% of heating costs. An alternative can be to compare before and after average usage for each cost. Another possibility is to keep a representative four-week diary to work out a pattern of use for your home work area for the entire financial year.
Instead of recording actual expenses for heating, cooling or lighting, you may be able to claim a deduction of 34 cents per hour based on actual use or an established pattern of use. This rate is based on average energy costs used in home work areas.
If you use a phone exclusively for business, you can claim a deduction for the phone rental and calls, but not the cost of installing the phone. If you use a phone for both business and private calls, you can claim a deduction for business calls and part of the rental costs.
You can identify business calls from an itemised phone account. If you do not have an itemised account, you can keep a record for a representative four-week period to work out a pattern of business calls for the entire year.
Mostly what the ATO wants to see with all of the above expenses is that an effort has been made to establish a reasonable claim, and that the private or domestic part of these expenses has been excluded. Talk to this office about what will be most appropriate to your circumstances.
Deductions for occupancy
Occupancy expenses are those expenses you pay to own, rent or use your home, even if you are not carrying on a home-based business. Occupancy expenses include:
- rent, or mortgage interest
- council rates
- land taxes
- house insurance premiums.
You must pass what the ATO calls an “interest deductibility test” before you can claim occupancy expenses (ask us about this). This also generally means however that the ATO expects you will have an area of your home set aside exclusively for business activities, such as an office or workshop, and that this area has “the character of a place of business” rather than simply being an office you use incidentally for income producing purposes.
You can generally claim the same percentage of occupancy expenses as the percentage area of your home that is used to make income, and again one common way to work this out is to use the floor area put aside for work as a proportion of the floor area of your home as a whole (as can be used for some running expenses, as mentioned above). So if for example your home office is 10% of the total area, then you may be able to claim 10% of rent costs or mortgage interest, council rates, insurance etc. In some situations it may be necessary to adopt a basis other than floor area, for example where say a huge workshop attached to the home may take up a great amount of floor space but contribute much less to the value of the overall property.
Note that where you are running a business from home rather than having a home office you can opt to claim occupancy expenses, such as mortgage interest. However, you’ll be expected to account for any capital gain attributable to the business area of the home when you sell the house. Generally the family home is exempt from capital gains tax (CGT), but if you’ve carried on a business based on the above, that portion of the home attributable to the business activity will be subject to CGT. There are however some CGT concessions for small businesses, which we can detail for you should this be relevant to your situation.
There are also deductions available for a “decline in value” (depreciation) of items such as electrical tools, desks, computers and other electronic devices, as well as for carpets, curtains, chairs and so on.
If you use your depreciating asset solely for business purposes, you can claim a full deduction for the decline in value (generally over its “effective life”). Remember however, that if you qualify as a “small business entity” (less than $2 million a year turnover) you can immediately write off most depreciating assets that cost less than $6,500 (from the 2012-13 income year onward). You may also be able to pool most other depreciating assets and claim a deduction for them at a rate of 30%.
However, if you also use the depreciating asset for non-business purposes, you must reduce the deduction for decline in value by an amount that reflects this non-business use.