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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.


Home office tax traps for sole traders

When a small business owner operates all or part of their business from home they often want to be able to claim a tax deduction for costs related to their home.

If their home is classed as business premises, small business owners can find they have an unexpected capital gains tax bill.

There are two ways in which costs associated with a home can be claimed as a tax deduction.

The first is when there is a home office rather than the home being a place of business.

Where you have a home office your claim is limited to the running costs such as electricity, gas, internet and telephone.

For a house to qualify as a place of business various conditions must be met so that there is a clear difference between home and the business.

One requirement can be to have a separate business entrance.

By meeting these conditions the portion of the property's costs that relate to the business can be claimed. Those costs include:
• Rent
• Mortgage interest
• Insurance
• Rates

In addition to being able to claim these costs a business trip starts as soon as you leave home when it is also a place of business.

Being able to claim these costs results in the portion of the house used for business purposes becoming liable for capital gains tax.

Where a home was used as a place of business after 20 August 1996 special rules apply for calculating what is taxable. Effectively the ownership of the home is split into two portions.

The first is when it was used purely as a home and the second when there was the business use.

For this first period of use as just a residence no capital gain tax will be payable on any increase in the value.

For the second period capital gains tax will be payable on the business proportion of the increase in the value for that time.

This is calculated by deducting the value of the home at the time its use changed from the selling value.

The assessable gain is calculated by multiplying the increase in value for that period by the percentage that the business portion of the home is of the total area.

To ensure capital gains tax is limited a written valuation should be obtained when the business use commences.

An example of how this works would be an accountant that decides to start a business.

An office is built as an extension to his home 1999. The house was purchased in 1989 at a cost of $165,000.

At the time the office extension was completed and the business use commenced it was worth $245,000.

The office makes up 10% of the total area of the house. The house is sold in 2008 for $400,000.

The gain of $80,000 from 1989 to 1999 is tax free. The gain for the time the house was used for business purposes of $180,000 will have 10% counted for capital gains tax.

Having a portion of a home lose its capital gains exempt status may not be a total tax disaster.

Where you meet the small business capital gains tax relief conditions no tax may be payable on the gain. Being a place of business it would qualify as an active asset.

This means for individuals the capital gain would be reduced by the 50 per cent general exemption, then by a further 50 per cent active asset exemption.

If the resulting capital gain was rolled in to a super fund no tax would be payable up to a gain of $500,000.   

Max Newnham, September 22, 2008
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