With the rise in cloud technology making the need to have a fixed ‘place of business’ outside the home far less important than it once was, many small business owners are choosing to operate from home. Meeting your clients at a decent café is a far more relaxed and friendly environment than a stuffy little serviced office anyway, right?
However, while your business can operate from your private residence with ease, this trend has also created confusion at tax time.
- Which home expenses can you claim as a tax deduction?
- How do you split expenses that are partially private and partially business?
- You used your car for business related trips during the year but are these kilometres deductible?
To help business owners navigate this minefield, we have pulled together the Do’s and Don’ts we usually share with clients who wish to claim deductions for expenses that would usually be seen as private (or ‘non-deductible’ in ‘accountant-speak’):
The ATO refer to these types of expenses as ‘occupancy expenses’. These include your rent or if you own your house, things like council rates, home and contents insurance and interest on your mortgage. We can also expand this list to include the costs of running the home such as the electricity, water, gas, telephone and internet.
Do claim ‘occupancy expenses’
Before you run off and claim all of your rent in your next tax return, there are some important rules to keep in mind.
Firstly, you need to set up an actual ‘Home Office’. Sitting on the couch with your laptop in front of the TV is not a home office. No questions asked. There needs to be an area in your home set up as a working space specifically allocated to your business.
Don’t claim the kitchen sink (or your floor area that is not an office)
Secondly (and most importantly) you will need to apportion your household expenses based on either the floor area of your home office or the actual usage depending on which expense you want to claim.
To claim occupancy expenses based on the sizes of your home office the calculation is as flows:
(Floor Area of your home office) x $Amount of the expense
(Floor Area of your entire house)
For example, if I have a 200 square metre home and I use a 5 square metre bedroom as my home office, I can claim 2.5% of my rent and other occupancy expenses as a tax deduction in my business’s income tax return.
Do apportion your expenses
Typically some expenses will have a higher business use percentage than that calculated by the floor area method. For example, your home internet and your mobile phone may be closer to 90% business related (if not 100%) so using the floor area method would significantly reduce the available deduction.
In this case you are permitted to calculate a reasonable estimate based on your actual usage. If your usage of your home internet based on hours used is 75% then you can claim that percentage of your monthly internet bill as a deduction.
So which method do you use for each type of home expense? The short answer is whichever method gives you the highest deductible portion, while still being easy to support in the event that the ATO requests evidence.
Do choose which method provides the best deduction
Typically the floor area method will be the most appropriate for occupancy expenses while other home office expenses are usually claimed under the actual usage method.
In the event all of the above just sounds like too much hard work, the ATO does allow a flat rate deduction for home office expenses to cover the extra electricity and deprecation on any furniture used. This deduction is claimed at a rate of $0.34 per hour for every hour spent working from home.
If you are looking to claim your home office expenses on a property you own, its worth keeping in mind the potential Capital Gains Tax (or “CGT”) issues that can arise from using your ‘main residence’ to produce taxable income.
Motor Vehicle expenses
Once you have established your residence as your ‘place of business’, trips from your home to see clients, visit work sites and attend any other business related function are tax deductible.
Do claim your trips from your home office to clients, work sites and engagements
The specifics of claiming motor vehicle expenses for a business owner are the same as those for an employee.
You can claim up to 5,000 work related kilometres per car in a given year without a logbook. This deduction is intended to cover all your motor vehicle expense (fuel, registration, insurance, maintenance, depreciation etc).
Business owners who wish to claim deductions in excess of this amount will need to keep a logbook for a 12 week period, that begins in the financial year you wish to claim the deductions.
The real ‘Do’
The main take away from this article is always make reasonable estimates that you can support when claiming tax deductions. This does not just apply to home office expenses but in all areas of tax.
If you are reasonable with the ATO they’re usually reasonable with you!
Do be reasonable!