With many individuals making the move to work at home and start their own home businesses, it’s important to know about capital gains tax as the Australian Tax Office (ATO) has those working from home on their radar due to the growing number of home-based businesses.
Capital gains tax is a tax payable when you make a gain on the sale of a capital asset, such as your home. Typically, the sale of your home will be exempt from paying capital gains tax, unless your home was used to run a business. For example, you run a childcare facility at your home or you have set up your home office and claimed running and occupancy expenses.
If you do run a business from home, there are three ways you can claim a tax deduction for running and occupancy expenses:
1. Use the ATO set rate of 34 cents per hour
This generally covers gas, electricity and office furniture. You should use this method if you don’t have a home office set aside exclusively for your business. You can be working from any room in your home, as long as no other family member is using the room at the same time as you. If you use this method, occupancy expenses such as rates, water and interest on your mortgage will not be tax deductible and your home will generally not be subject to capital gains tax.
2. Actual running costs
This method is recommended for those who don’t have a home office set aside exclusively for business. In this method, you can also claim the actual cost of your office furniture. However, you won’t be able to claim home occupancy expenses, and your home will generally not be subject to capital gains tax.
3. Claiming occupancy and running expenses using the floor area of your home
With the final method, you must pass “The Interest Deductibility Test’. To pass this test, you must have part of your home set aside exclusively as a place of business and it must be identified as such. You may then claim occupancy expenses such as rates, water, interest on your mortgage and rent based on the floor area of your home office. For running expenses you can use the floor area to make an estimate, or you can calculate the actual cost per hour. If you are eligible for this, then a portion of your house will be subject to capital gains tax. However, many small business owners believe if they don’t claim any home occupancy expenses in the tax return, they will avoid subjecting their family home to capital gains tax which is untrue. If you pass the interest deductibility test, the can force you to pay capital gains tax regardless of if you haven’t claimed any expenses as a tax deduction.
A good idea if you run a business from home is to get a valuation on your home when you start using a separate room to run your business. Also, get another valuation when you stop using that room or you cease business. It’s very important that you communicate with us and discuss whether it’s worth subjecting your house to capital gains or whether you may be better off claiming 34 cents per hour as a tax deduction. Make sure all your estimates are as accurate as possible and avoid making a guess as the ATO will expect exact numbers.
If you have any questions about capital gains tax and running your home business, please don’t hesitate to get touch with the team here at Fortis Accounting Partners. You can reach us on 02 9267 0108, or via info@exemplary-financial.flywheelsites.com.
