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Disclaimer

This is not advice. Items herein are general comments only and do not constitute or convey advice per se. The information contained in these articles is for guidance only and should not be relied upon without obtaining professional advice having regard to your direct circumstances.

 

Tax issues in working from home

There are many advantages in working from home ranging from flexible hours to fewer overheads, but a good grasp of the tax and financial issues is important.

The expenses of running a home based business need to be clearly separated from home and personal finances so that the owner can take a disciplined approach and clearly understand how well the business is performing.  It is not just a case of ensuring that personal expenses are not allocated to the business – there are many legitimate expenses that can be deducted from the business and these need to be properly understood.

It’s a good idea to take steps to set up appropriate financial and accounting disciplines, such as:

• Keep any business loans separate form private loans, to make it easier to determine which interest payments are tax-deductible.  This helps to avoid arguments with the Australian Taxation Office (ATO)

• Maintain separate bank accounts for business and personal finances

• Bank all business income promptly (including any received cash) to business account do that there is a clear trail showing the source of business income

• Pre-determine your own bookkeeper or accountant. This allows owners to focus on what they do best; sets up a disciplined approach; and gives access to additional knowledge and help, and an extra level of discipline.

• Get receipts for all expenditure, particularly payments in cash, so that costs can be recovered from the business as appropriate.

• Know what costs can be allocated to the business - such as a proportion of rent, if you do not own your home and utilities.

The ATO allows a range of expenses to be claimed if a portion of the home is being used as a place of business, as opposed to simply having an office to bring work home to from your main place of business.

Working from home can also have capital gains tax (CGT) consequences for those who own their home and this needs to be understood and taken into account.  If certain tax deductions have been claimed in running a business, you will be taxed on the capital gains during the period that the property was used for business purposes when the property is sold, taking into account the percentage of the house devoted to business use. Therefore, before claiming tax deductions for occupancy costs such as council rates, land tax and mortgage interest, decide whether you are willing to take on the CGT liability.

However, if the home is used to carry on a business (not just a home office), the CGT issues arise regardless of whether tax deductions are claimed for occupancy costs.

Some tax deductions include:

• Running costs (including electricity and heating) – the ATO allows claims on amounts representing the additional cost incurred on top of the cost that would normally have arisen without business use. This will usually be calculated based on the percentage of total floor area used and the percentage of business use of the relevant area

• Telephone costs – where possible these costs should be specifically allocated between business and personal, eg identify business-related STD and mobile calls. Alternatively, a responsible and justifiable estimate can be used.

• Internet charges – similarly, a reasonable estimate should be made of the percentage of business interest use, with allowance made for private use.

• Cleaning – an appropriate portion may be claimed on the bases of the percentage of floor area used and the percentage of business use of the relevant area

• Depreciation –The depreciation on any equipment or furniture used exclusively for business purposes, may be claimed in full. If the asset is used partly for business purposes, an appropriate share of the depreciation charge may be claimed.

• Motor vehicle expenses – working from home means there will not be any home-to-work trips (which are private); therefore business trips (eg visiting clients) will form a higher percentage of total kilometers. This should allow business owners to claim a higher proportion of total car expenses.

• Occupancy costs – these costs may include council and water rates, mortgage interest, rent, and house insurance premiums, claimed on a floor area basis. However, claiming these may trigger CGT on sale of the property.

• Capital allowance for building costs – where the house or unit has been constructed within the past 20 years, a capital allowance may be available at the rate of 2.5 per cent p.a. prime cost on the original building costs, apportioned for the percentage of business use; and

• GST input tax credits (ITC) – where GST is included in any of the costs listed above, the approach for determining the portion of the ITC to claim is essentially the same as for calculation the tax deductible amount.

Peter Bembrick
My Business, February 2009

 


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