A home-based business is one where you operate the business:
- At home, that is, you carry out most of the business’s work at your home. For example, a dressmaker who does all their work at home, with clients coming to their home for fittings, or
- From home, that is, the business does not own or rent any premises other than your home. For example, a tiler who does most of their work on clients’ premises but does not have any other business premises.
Claiming your business expenses
Running a business at or from your home is similar to running any other business. That is, if you operate a home-based business, you can generally claim similar expenses to a business that is not home-based.
However, two types of expenses that are specific to carrying on a home-based business are:
- Expenses related to the area of your home you use for business, and
- Motor vehicle expenses between your home and other business locations.
Expenses for your home business area
If you operate a business at or from your home, you may be able to claim a deduction for some of the expenses relating to the area you use for business purposes.
These expenses are either:
- occupancy expenses, or
- running expenses.
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, and house insurance premiums.
You must pass the interest deductibility test before you can claim occupancy expenses. This means you must have an area of your home set aside exclusively for your business activities (for example, an office or workshop).
Interest deductibility test
You use the interest deductibility test to work out if you are entitled to claim occupancy expenses (including mortgage interest) as a deduction.
To claim a deduction for part of the interest you pay on money you borrowed to buy your home, the area you have set aside must have the character of a place of business; for example, a hairdresser’s home salon, a caterer’s home kitchen or a photographer’s home studio. While this will depend on your particular circumstances, an area of your home is likely to have the character of a place of business if it is:
- clearly identifiable as a place of business (for example, you have a sign identifying your business at the front of your house)
- unsuitable for private or domestic purposes
- used exclusively or almost exclusively for carrying on your business, or
- used regularly by your clients.
If you satisfy the interest deductibility test, you must account for any capital gain you make when you sell your home. You may satisfy the interest deductibility test even if you did not:
- borrow money to buy your home – you must apply the test on the assumption that you did borrow money to buy the home, or
- claim mortgage interest as a deduction.
How much you can claim
You can claim the percentage of occupancy expenses that relate to the area of your home you use as a place of business.
A common method of working out how much to claim is to use the floor area you use for your business (as a proportion of the floor area of your whole home). For example, if the floor area of your home office is 10% of the total area of your home, you could claim 10% of your rent or mortgage interest, council rates and insurance.
In some circumstances, using the floor area of your home as the basis of your claim may not be the best method of working out how much to claim. For example, the value of a large workshop near the house may be a small proportion of the overall value of the property. In these circumstances, we will accept an alternative method of working out how much of your home you use for business purposes, as long as the method you use is reasonable and based on accurate information.
Running expenses are the increased costs of using facilities within your home because of your business activities.
Running expenses include:
- the cost of using a room (such as electricity and gas costs for heating, cooling and lighting)
- business phone costs
- the decline in value of plant and equipment (for example, chairs, bookcases, computers, grinders)
- the decline in value of furniture and furnishings (for example, curtains, carpets, light fittings)
- the cost of repairs to furniture and furnishings, and
- cleaning costs.
If you work at or from your home, you can claim a deduction for additional expenses you incur in running your business. This means you must often work out the portion of the expense that relates to business and private use to work out how much you can claim.
If you are eligible to claim your running expenses only, you will not incur CGT if you sell your home.
How much you can claim
You can claim the additional expenses you incur because you carry on a home-based business, for example, additional electricity, heating or cooling costs (utilities), additional cleaning costs or additional phone expenses.
Using your floor area may also be an appropriate way of calculating some running expenses. For example, if the floor area of your home office is 10% of the total area of your home, you can claim 10% of heating costs.
Where you do not have an area of your home set aside exclusively for business, you cannot claim on a floor area basis as this area is also used for non-business purposes. In this case, you must show how you arrived at the amount you are claiming. Some other basis may be appropriate, for example, you can compare utility accounts from before and after you commenced business to assess increased costs.
How you work out these additional costs is up to you, but you should be able to provide enough information to show:
- your claim is reasonable, and
- you have excluded the private (domestic) proportion of expenses associated with normal living costs.
The ATO also accept the following methods for working out how much of your expenses are for business purposes.
Keeping a diary
You can keep a diary that shows how you use your home work area for a representative four-week period each financial year to work out a pattern of use for your home work area for the entire year. You must allow for periods such as holidays or illnesses.
If there is no regular pattern to how you use your home work area, you must keep records of each time you use the area during the year, and the purpose for which it is used.
You must keep a diary for each financial year.
Claim 26 cents an hour for Home-office expenses
Instead of recording actual expenses for heating, cooling, lighting and furniture depreciation (such as desks and shelves), you can claim deduction of 26 cents an hour based on actual use or an established pattern of use. You need to base the rate of 26 cents an hour on average energy costs and the value of common furniture items used in home work areas.
You must separately work out all other home work area expenses, such as phone expenses and depreciation on computers or other equipment.
Where you can claim a GST credit for a depreciating asset, you must deduct the amount of the GST credit you can claim before you work out the depreciation deduction.
Utilities (gas, electricity)
These expenses must usually be apportioned. If the business percentage is based on anything other than the floor area (for example, on actual electricity use) you must document your claim to show how you arrived at the amount.
You can only claim a deduction for expenses you incur as additional running costs because of your business activities. For example, if you work in a room where other family members are watching television, it’s unlikely you will have additional heating costs as a result of that work activity.
Your business use of the home work area must also be substantial and not merely incidental. For example, you can not claim 24 hours per day running costs simply because your fax machine is on all the time to receive business faxes.
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. The installation cost is a capital expense.
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. Use the following formula to work out the percentage of phone rental expenses you can claim:
Number of business calls you made and received
Number of total calls made and received X 100
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, provided you have a regular pattern of use throughout the year.
Business plant and equipment
You can claim a deduction over a number of years for the decline in value (depreciation) of assets you use for business purposes.
If you use plant and equipment solely for business purposes, you can claim the full amount of depreciation. But if you also use equipment (such as a computer, photocopier or circular saw) for non-business purposes, you must reduce the depreciation deduction by an amount that reflects this non-business use.
You work out the amount of depreciation to claim as a deduction based on an estimate of the percentage of business use. You can base this estimate on a diary record of your business and non-business equipment use for a representative four-week period. Your diary record must show:
- what the equipment was used for
- whether the equipment was used for business or non-business purposes, and
- the period the equipment was used for.
Most businesses work out the deductions they can claim for depreciation of assets under the uniform capital allowance system. However, if you have less than $2 million turnover you can use a simpler and more generous system. By using the simplified depreciation rules, you can:
- immediately write off most depreciating assets that cost less than $1,000 each, and
- pool most other depreciating assets and deduct them at a rate of 30% (if their effective life is less than 25 years) or 5% (if their effective life is 25 years or more).
The above advice is intended as a guide only. Please contact Eclipse Accounting Group if you require additional information or clarification on any issues or rules.