There is a lot of hearsay, rumour and innuendo about claiming home office running expenses for your business, but the rules are really very straightforward and easy to apply.
Generally speaking, most people operating a business and working from home can use their additional utility costs (gas, electricity, phone) as deductions. The same applies to the equipment required to conduct this business (desk, computer, filing cabinets).
The main confusion is around the question of “Can I claim a portion of my rent or mortgage for my home office?”. This article will clarify the issues at hand and provide you with some answers.
I will try to demystify claiming Business Home Office expenses, particularly in relation to rent and mortgage deductions.
The ATO calculators are helpful, but you really need to know what you are doing before you can use them.
The availability of Home Office deductions depend on whether or not you are running a business and have a dedicated work space for it at home. You first need to figure out which category you fall into:
1. You are running a business and may be able to claim:
- Occupancy costs^ – rent or mortgage payments, rates, building insurance, depreciation of carpets and blinds etc.
- Running costs – electricity, gas, cleaning, depreciation on office furniture
2. You are NOT running a business but have a dedicated workspace and may still be able to claim Running Costs
3. You do not have a dedicated workspace, but may still be able to claim some Running Costs
^ only available to those running a business with less than 80% income coming from one customer.
So how do you know if you qualify?
TEST 1 = Dedicated Work Space
Does your workspace qualify for a home office deduction? The space must be exclusively used for business and not easily convertible for use as a bedroom, dining room etc. Unfortunately, a desk in your bedroom or using the dining table does not cut it.
TIP: If you qualify, take a photo of the space and send it to us, to keep on your file so we can produce it in the case of an audit.
If you do not have a dedicated workspace, you may still be entitled to claim running costs.
TEST 2 = Your Home As The Sole Place Of Business
You may be able to claim occupancy costs if, for example:
- You are a small business operator whose main office is in their home
- You are a tradesperson or craftsperson who has their workshop at home
- You are a doctor or dentist who has their surgery or consulting room at home
It is important to note that if you have a dedicated office to go to, but choose to work at home, you do not meet the criteria of your home being a place of business.
|Deductions you may be able to claim||You do have a work area||You don’t have a work area|
|Cost of using a room’s utilities such as gas and electricity||Yes||Yes|
|Work-related phone costs||Yes||Yes|
|Decline in value (depreciation) of office plant and equipment such as desks, chairs and computers||Yes||Yes|
|Decline in value (depreciation) of curtains, carpets and light fittings||Yes||No|
|Occupancy expenses such as rent, mortgage interest, insurance and rates||No||No|
Deductions Available Where Your Home Is Your Principal Place Of Business
Step 1 – Calculate the business use percentage
If you pass the TEST 1 & 2, then you are virtually entitled to claim a business’ use percentage of all property expenses and running costs as you would, if it were an investment property. You now need a reasonable method of estimating the business use percentage.
Commonly, a floor plan of the home is used to calculate this (see example below). Shade out the areas used exclusively for business use.
To calculate the business use percentage, you simply estimate the area of your workspace and divide that by the total area of the home. Send it to us to keep on your file in case of an audit.
Running costs can be claimed on an actual usage, percentage estimate, floor plan apportionment or other written reasonable apportionment basis. See Calculating Home Office Running Expenses below, for more guidance.
Step 2 – Determine if Capital Gains Tax may apply
- If you are renting, Capital Gains Tax does not apply
- If you are buying or own your home, Capital Gains Tax may apply, but you may be eligible for Small Business Concession, which has the potential to reduce this tax to nil. The key is to retain the information required to make the necessary calculations.
We recommend that you:
- obtain a valuation on commencement of the use of the home as a business (if not commencing on the purchase of the property)
- commission a Depreciation Report on the property
- keep a record of the proportion of floor area of your home that is set aside to produce income. This may change over time
- keep a record of the period of time you used it for this purpose
It is important to get this right, because even if you do not claim the occupancy deductions but are entitled to, your home may still be subject to Capital Gains Tax, but may be eligible for the Small Business Concession.
Deductions Available Where Your Home Is NOT Your Principal Place Of Business
Calculating Your Home Office Running Expenses
Primarily, we are looking to calculate the incremental, additional or actual costs incurred in operating the business from home vs normal domestic usage. In other words, what has been necessarily incurred to produce taxable income?
You can claim a deduction for the following:
- the cost of using the room’s utilities, such as gas and electricity – which must be apportioned between business and private use, based on actual usage
- business phone costs – if a telephone is used exclusively for business, you can claim for the rental and calls, but not the installation costs. If the telephone is used for both business and private calls, you can claim a deduction for business calls
- decline in value (depreciation) of office plant and equipment, such as desks, chairs, computers. If equipment such as a computer is also used for non-business purposes, your claim must be apportioned between business and private use
- where you do have a dedicated work area, decline in value (depreciation) of blinds, carpets and light fittings
In conclusion, the rules are pretty simple so you just need to work out where you’re at… Are you running a business from home or is it just a home office and does it have a dedicated space?
The key to claiming rent and mortgage payment is having the home as the principal place of business and having dedicated space set aside to work.