Home-based businesses are a large part of the Australian business community. Working from home is becoming increasingly popular as it can offer flexibility and convenience, and can offer a real opportunity to start a new career.

Nevertheless, it can seem like the lines between business and personal expenses become blurry when you run a home-based small business.

A home-based business is one where your home is also your principal place of business, that is, you run your business at or from home, and have a room or space set aside exclusively for business activities.

If you carry on a home-based business, you need to use the right method to calculate your expenses, based on your business structure.

Sole Trader or Partnership

If you work from home, either as a self-employed person or as an employee, your ability to claim a deduction for the cost of running your home and paying costs such as rent will depend entirely on your individual circumstances.

You may fall within these two categories of expenses:

• Occupancy expenses – these relate to the costs of ownership. This includes mortgage interest, rent, rates, house insurance and land tax
• Running expenses – these will fluctuate with usage. This includes electricity, gas, cleaning, depreciation and repairs on office equipment

To determine if you can claim occupancy and running expenses, or only running expenses, you will need to determine if the area of the home in question has the character of a place of business, rather than merely a private study area.

Indicators that an area of your home has the character of business includes that it’s;

• clearly identifiable as a place of business, for example, you have a sign identifying your business at the front of your house
• not readily suitable or adaptable for private or domestic purposes
• used exclusively or almost exclusively for carrying on your business
• used regularly for visits by your clients.

If you pass the interest deductibility test, you can claim the percentage of both occupancy and running costs to the area of your home you use as a place of business.

Note that you may have to pay tax on any capital gains you make when you sell your home.

Comparatively, you can only claim running expenses if you run your business from home even if it doesn’t have the character of a ‘place of business’.

Company and Trust

If you run your home-based business as a company or trust, your business should have a genuine, market-rate rental contract (or similar agreement) with the owner of the property. The agreement will determine which expenses the business pays for and can claim as a deduction.

If there isn’t a genuine rental contract, there may be tax implications for you and the business for providing benefits to you.

If you’re both the business owner and also an employee of the business and the business pays for or reimburses you for some of the expenses of running your business from home, you can’t claim a deduction for the expenses in your individual income tax return.

Therefore, the employee/owner will report rental income in their tax return and the entity will report rental expense in theirs.

Please note in either cases when the house is sold the owner may have to pay tax on a portion of any capital gain made. Should you wish to discuss your circumstances and what your real entitlements are then please do not hesitate to contact us.

Written for you by Emelia Afful