The effects of COVID-19 are far reaching. Many Australian’s lost their jobs and many businesses were forced to permanently close their doors. All of this turmoil has meant massive changes across the working landscape. If you’re one of the many Australians who used this time to start a new business, either out of necessity or to take advantage of an opportunity, you might be running your new business (or existing business) from home. There are many expenses that can be claimed if you run a business from home to take advantage of.
A home-based business means that you do most of your work at your home where you do not rent or own a separate premise to run and operate your business.
Pro Tax Tip: If you don’t run a business from home yet do work from home on your business, there are tax deductions that can be claimed as ‘working-from-home’ expenses.
A home-based business is where your home is the principal place of business. There are as many options as there are businesses.
Examples of home-based businesses:
- Bed and breakfast operator
- Market gardener
- Web designer, desktop publisher or graphic designer
- Hairdresser operating a salon from home
- Artist who works from a home studio
- Dressmaker who does fitting and sees clients at home
- Bricklayer, plumber, carpenter, tiler, fencer, electrician, builder, engineer, draftsperson, cabinetmaker, woodworker
- Film editor or musician
- Tutor / educator
- Dietician, chiropractor, councillor, psychologist
- Photographer, beautician, cake decorator
- Architect, interior decorator, house painter, cleaner, gardener
Your business structure – sole trader, partnership, company or trust – will determine what and how you can claim when claiming home-based tax deductions.
You can claim operating expenses and running expenses if you’re a sole trader or partnership. Whether you can claim both depends on the area in your home you run your business from.
Running expenses are increased costs you incur by using your home’s facilities. This is the cost of running your room and includes:
- Heating, cooling, lighting
- Cleaning, maintenance and repairs
- Phone and internet
- Decline in value of business furniture and equipment
Three Methods of Claiming
There are three way to claim your costs as long as you’re reasonable in your estimations, exclude private living costs and can show that they are business expenses.
Actual cost method – you claim the actual costs of your expenses by adding your bills, portioning your business percentage and claiming those exact costs.
Fixed rate method – You calculate the hours you work and multiply that by 52 cents per hour you operate your business from home. This can be based on actual costs or pattern of use. Claiming using this method covers you for heating, cooling, lighting, cleaning, decline in value of office furniture and furnishings
Shortcut method – From 1 March 2020 to 30 June 2022 you can claim 80 cents per business hour which is similar to that of the fixed rate method. This method is all inclusive. If you use it, there are no more costs you can claim from working from home such as mobile phone, internet, stationary or electronic equipment such as monitors.
Pro Tax Tip: It pays to crunch the figures when claiming each method. They all will calculate differently and one method will be better than another method depending on your circumstances. All methods are not equal.
If you have a room or space set aside for your business, it may be better to split your heating, cooling and lighting based on the floor plan / space of your business. You’ll also need to portion the time of year you used the room for business. Claiming expenses when you’re on holiday is a no-no.
If you use the 80 cents per hour or 52 cent fixed costs, you won’t have to calculate heating, cooling and lighting as they are included in the hourly claim rate.
When claiming phone and internet charges, you can claim business calls and a portion of the line rental if using the fixed rate method. When using the fix cost method, you’ll be able to claim a percentage of your overall costs for your business expenses. If using the shortcut method, you phone and internet charges are already included in your claim.
Pro Tax Tip: If you’re working out your expenses based on ‘pattern of work’, you’ll need to keep a logbook or diary for a representative four-week period that is averaged out for the year to show how you work out your business percentage. If you can’t show a regular pattern you’ll need to keep detailed records. If you are claiming the shortcut method then you need to keep a record of the hours for the entire period of claiming.
Sole traders and partnerships are eligible for claiming occupancy expenses, which include:
- Mortgage interest or rent
- Council rates
- Land taxes
- House and content insurance
Occupancy expenses can only be claimed if you have a dedicated work space for your business. This space must be clearly be identifiable as your place of business, not easily adaptable for private use, is used exclusively for your business, used regularly by clients or your business.
To claim occupancy expenses as a trust or company, there must be a rental contract or agreement with the owner of the property. If you’re an employee and your company reimburses you for working from home costs, you can’t claim any expenses. You may be subject to Fringe Benefits Tax (FBT) if it pays for or reimburses your costs.
Capital Gains Tax (CGT)
You may incur CGT when you go to sell your home if you claim occupancy expenses and receive rental income. The main residence exemption may not apply for the proportion of your home and the period when you ran your business.
Pro Tax Tip: There are other expenses that can be claimed if you work from home, including motor vehicle expenses, business travel, worker’s salaries, wages and super contributions.
When claiming your home office or working from home, you’ll need the records to prove your claims. The ATO can reject any claim if they are not substantiated. Keep your receipts, bank statements, tax invoice and / or contracts and agreements to back yourself up. Keep a log book or work diary in conjunction with your receipts and invoices.
Claiming the costs of managing your tax affairs is tax deductible for individuals and businesses. ITP have helped Australian individuals and small business for 50 years. For expert advice, seek the help of a professional. Phone 1800 367 487 and chat with an ITP Tax Accountant today.