Tax deductions for home-based SME owners

Close to one million businesses in Australia are home based – a significant portion of the nation’s business community. In the first of a two-part feature we look at deductions home based business owners may be able to claim.

Running such a business offers a number of advantages including flexibility, convenience, freedom and cost savings. And when it comes to tax time, operating a business at your home means you may be eligible for a number of tax deductions.

In most cases, a home based business owner can claim all of the deductions that other small-business owners can, but they also get access to unique deductions. With end of financial year just around the corner, here are a few tips about what you can and can’t deduct.

Firstly, you don’t have to physically do your work at home to be considered a home based business. For example, a plumber who does not own any premises other than his home, can have his business classified as home-based, despite the fact that most of his work is performed off-site.

Other examples of home based businesses include the owner of an online fashion boutique whose main office is in their home, or a dentist who has their surgery at home.

Expenses you can claim on your home business can be broadly classified into two categories: occupancy expenses and operating expenses.

Occupancy expenses

These expenses relate to parts of the home you use for business such as rent, interest on your mortgage, council rates, land taxes and home insurance premiums.

Operators of home based businesses need to first pass the ATO’s interest deductibility test before becoming eligible to claim occupancy expenses. This means you must have an area of your home set aside exclusively for your business activities, such as a surgery, office or consulting room.

During the review, the ATO will assess a number of factors, such as the frequency of client visits, signage on your property that identifies the business, and whether or not the business area is also suitable for residential occupancy.

If you pass the test, you can claim a portion of your occupancy expenses. The portion corresponds directly to the amount of space you use as a place of business.

For example, if the floor area of your home office or workshop is 20% of the total area of your home, you could claim 20% of your rent or mortgage interest, council rates and insurance.

While reducing the home mortgage is a great idea, there is one potential pitfall: if you pass the interest deductibility test, you may need to pay capital gains tax when you sell your home. This can apply even if you never make a tax deduction claim on this expense, so it’s best to consult your accountant to ensure you claim occupancy expenses in a tax effective way.

Next week we’ll look at deductions you may be eligible for as a result of operating expenses and depreciation of your business’s assets.

James Solomons, Head of Accounting, Xero Australia

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