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Home-Based Businesses – Know your Deductions

Now that another financial year has been and gone, it can be tempting to put tax to the back of your mind as you gear up for another busy year. However, if you’re running a business, particularly from home, it is crucial that you keep on top of what you can claim as a deduction year-round, so when it comes to June 30, you’ll have everything you need to legally minimise your tax obligations.

If your business is structured as a sole trader or partnership, the two broad categories you can claim for are running expenses and occupancy expenses. Which of these you are eligible to claim depends on whether or not you have a dedicated area of your home set up as a place of business.

Claiming a Deduction for Running Expenses

If you operate your business from home, for example in a separate study or an area of the home designated for your business activities, you may be able to claim a deduction for running expenses. These include gas and electricity bills (for things like lighting, heating, cooling etc.); landline and internet service costs for the business; and the depreciation in value and repair costs in relation to furniture, furnishings and equipment in your dedicated business space.

Note that even if your business setup at home doesn’t necessarily have the “character” of a place of business, it’s important to remember that you can still claim running expenses in accordance with the above. Also keep in mind that you should maintain records to show how you calculated your expenses, and only include the business-related costs. A four-week diary in a representative period each financial year is a good place to start. If a regular pattern cannot be maintained, then a more detailed record should be kept.

The Fixed-Rate Method: For each hour that you operate your business from home, you can claim a deduction at a flat rate of 52 cents per hour, measured against your actual use of your home as a place of business, or against a pattern of use (whichever is more relevant to your circumstances). This applies to heating, cooling, lighting, and the depreciation of business assets.

The ATO brought in the 80 cents per hour shortcut method from 1 March 2020 as a temporary measure to assist people working from home as a result of COVID-19. This is due to run until 31 December 2020, so for home expenses incurred between 1 July 2020 and 31 December 2020, the higher 80c p/h shortcut can be used. This also covers a broader range of deductions, see here for further information: https://www.ato.gov.au/General/COVID-19/Support-for-individuals-and-employees/Employees-working-from-home/?=redirected_wfh. Unless this is extended, deductions claimed for 1 January 2021 to 30 June 2021 on your 2020/21 Tax Return will need to revert back to the 52 cents per hour method or to the proportional cost method detailed below.

Proportional Cost Method:

If you have an area of your home set aside for running your business, you may calculate the proportion of your entire floor area that it covers, and divide your heating, cooling and electricity costs based on that, measured alongside the amount of time over the year that it was used for business. The same applies to home phone and internet expenses – claim a deduction for your business calls and a portion of the line rental costs (where applicable) and the proportion of data used for the business.

Instant asset write-off:

Note that for business assets purchased from 12 March 2020 until 31 December 2020, the instant asset write-off threshold is increased from $30,000 to $150,000, and eligibility for it has increased from businesses with aggregated annual turnover of $50 million up to $500 million. Therefore, if you’re purchasing and using business assets between 1 July 2020 and 31 December 2020 and fit within that criteria, you’ll be able to claim their full value on your 2020/21 Tax Return. For more on that, check out part 7 of our Comprehensive Coronavirus Stimulus Package Guide.

Claiming a Deduction for Occupancy Expenses

For the purposes of claiming a deduction for your home-based business, the ATO define “Occupancy Expenses” as mortgage interest or rent; land taxes; council rates; and home & contents insurance policy premiums.

This only applies for home-based businesses where the part of the home set aside for business has the appearance and character of a place of business, indicated by things like a sign out the front of your home; exclusive or nearly exclusive use for the business; regular businesses by clients or customers; and/or the space would not be able to be easily adapted or converted back to domestic, private use.

As a rule of thumb, home-based businesses that are eligible to claim occupancy expenses are also able to claim running expenses in accordance with the first section of this article.

Other considerations & Next Steps

When home-based businesses are eligible to claim occupancy expenses, there are often Capital Gains Tax (CGT) consequences when it comes time to sell, as the Main Residence Exemption may not apply to the business-oriented part of the home in the periods for which it was used for business activities.

The rules for claiming business expenses can be different if you operate as a trust or company. The tax implications around these sorts of entities are generally quite complex, so seeking professional advice from McKinley Plowman is always a good move.

Navigating the complex tax system in Australia can be challenging at the best of times – if you’re operating a business from your home and want to remain fully compliant whilst maximising your deductions, get in touch with McKinley Plowman today. Contact us via our website or call us on 08 9301 2200.

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McKinley Plowman