If you are one of the large number of micro-business start-ups or self-employees, it is important to understand the taxation treatment of business expenses that can be claimed in these circumstances.
Generally, the cost of running and maintaining the family home are considered to be private expenses, and cannot be claimed as a tax deduction. The exception occurs when part of the home is used to run a business. This is usually done by a sole trader or it could also be a micro-business, defined as a business employing less than five people. There are also some deductions available for people who work from home but the business is located elsewhere.
Two types of costs can be claimed
The type of costs that can be claimed depends on the individual circumstances. The two types are:
- Running costs which include things like electricity, gas, phone, internet and depreciation on furniture and office equipment.
- The other is occupancy expenses such as rates, water and insurance, as well as interest on the mortgage or rent.
If the home is also the place of business, and there is a designated area such as a home office from which the business operates, then occupancy expenses can be claimed. If the main business or work is done somewhere else, and only some work is performed from home, then only running costs are claimable. To make certain that these distinctions are understood and correct deductions claimed, it is best to discuss the issues with an accountant who knows the tax legislation in this respect.
How to determine the percentage that is claimable
Your accountant can also help you apportion the percentage of the usage in both instances that can be applied to a work situation. It is not allowable to claim the entire costs of running or occupying the home as a tax deduction, only that proportion that is used by the business or work. There are a couple of methods used to do this.
The first method is to estimate the percentage of the home being used for business purposes and claim that percentage of the occupancy expenses. The second method is to use the figure the ATO issues from time to time as a fixed hourly rate for the time spent in the home office.
To make sure these calculations are accurate, we highly recommend you seek professional advice as getting it wrong could mean additional tax and penalties further down the track that could be quite substantial. We have an experienced team of advisers available who can give you guidance and help to set up the appropriate systems to keep track of these expenses.