Plenty of online businesses start at a kitchen table or in a spare room. Running from home keeps costs low while sales build. It also raises tax questions that catch new owners out. Which household bills can you claim? And what happens when you sell the house?
This guide sets out how the Australian Taxation Office treats home based business expenses. It covers running costs, occupancy costs, record keeping and capital gains tax. It is general information only. Your own situation may differ, so check with a registered tax agent.
What the ATO means by a home based business
The ATO describes a home based business as one where an area of your home is set aside and used only as a place of business. That might be a spare room fitted out as an office or a garage used for packing orders. If you have no set area but still do some work at home, you may claim some costs for the space you use. In every case, you can only claim the business share of an expense.
GST is worth a mention here too. If your business is entitled to GST credits, you can only deduct the GST exclusive amount of an expense. The ATO guide to home based business expenses sets out these rules in more detail. It is the best place to start before you lodge.
Running expenses you may be able to claim
Running expenses are the costs of actually using your home to work. The ATO lists electricity, phone costs, cleaning and the decline in value of plant and equipment. Repairs to furniture and furnishings also count. You can claim these even without a dedicated place of business. A desk in the lounge room used for your online store can still qualify.
The ATO accepts any reasonable method of working out the business share. You must leave out private costs and keep records. The ATO names three common methods. Each suits a different set up, so it pays to compare them.
- Actual cost: you claim the real business share of each expense, backed by bills and receipts.
- Fixed rate: you claim an hourly rate that covers energy, phone, internet, stationery and computer consumables.
- Floor area: suited to a set aside place of business, using the share of floor space used for work.
The fixed rate method needs a record of every hour worked from home across the year. You also need one document for each other running expense it covers. Costs the rate does not include, such as cleaning, can be claimed separately. You can also claim the decline in value of items like laptops, mobile phones and office furniture.
Many online sellers use the same laptop and phone in their private life. In that case you split the claim based on how you actually use each item. Simplified depreciation rules are available to businesses with an aggregated turnover under $10 million. Ask your tax agent which option suits your equipment.
Occupancy expenses and the place of business test
Occupancy expenses are the costs of owning or renting the home itself. The ATO lists rent or mortgage interest, council rates, land tax and house insurance. These can only be claimed if the area has the character of a place of business. The ATO notes this can still apply if most of your business is conducted online.
Signs your space is a place of business
The ATO looks at several indicators. The area should be clearly identifiable as a place of business and not easily suited to private use. It should be used only or almost only for the business. Regular client visits also point the same way.
Occupancy costs are usually worked out from the floor area used for business. The part of the year it was used for business also counts. If you earn personal services income, some occupancy expenses may not be deductible. A tax agent can tell you whether those rules apply to you.
Running the business through a company or trust
Some online businesses operate through a company or trust. The ATO says a home based business run this way needs a genuine, market rate rental contract with the property owner. Your structure can also change which methods you can use and which expenses you can claim. Set this up properly before the business starts paying for space in your home.
Capital gains tax when you sell your home
This is the part many owners miss. The ATO warns that if you use part of your home for business, you may have to pay tax on a capital gain when you sell. Your main home is normally exempt from capital gains tax. Business use can reduce that exemption.
The ATO page on using your home for business explains when this applies. Your home must be your principal place of business, with space set aside for it. Working from home occasionally or by choice does not qualify. In that case your full exemption is not affected.
Where business use does apply, the ATO uses what it calls the interest deductibility test. You treat yourself as if you had borrowed to buy the home, even if you did not. If you could claim part of that interest, your home is subject to capital gains tax to the same extent. You cannot get around this by choosing not to claim interest on a real home loan.
There is some relief available. You may still get a partial main residence exemption on the private part of the home. Small business CGT concessions may also reduce the gain. An accountant can work out how these fit together for you.
Timing matters as well. If you first used your home to earn income after 20 August 1996, you generally need a market valuation at that point. The gain is then measured from that value, not your original purchase price. Sell within 12 months of that first use and you cannot use the CGT discount.
Keeping good records
The ATO asks you to keep complete and accurate records for at least five years. For a home based business, that means bills, receipts and a log of hours worked. A simple sketch of your floor area helps support occupancy claims. Digital copies stored in a folder for each tax year make life easier at lodgement time.
When the business outgrows the house
Some online businesses stay at home for years. Others fill the spare room with stock within months. If you plan to rent a shopfront or warehouse, read about change of use approval for business premises before you sign anything. Short term commercial storage units can bridge the gap while you decide.
Moving into a proper office brings new running costs to plan for. Cleaning is one that people often forget. This guide to choosing a commercial cleaning partner covers what to look for. It is also worth looking after yourself through the change. Working alone at home can be isolating, so read up on your mental health when starting a business.
Frequently asked questions
Can I claim rent if I only use a corner of the lounge room?
Generally no. Rent, mortgage interest, rates and insurance are occupancy expenses. They need an area with the character of a place of business. You may still be able to claim running costs such as electricity and phone.
Does working from home affect capital gains tax on my house?
It can. If your home is your principal place of business with space set aside, the main residence exemption may be reduced. Occasional work from home by choice does not count as business use. Get advice before you start claiming occupancy costs.
How long do I need to keep records?
The ATO asks for records to be kept for at least five years. Keep receipts, bills and a record of the hours you work from home. Your records need to support every claim you make.
Can my company claim home office costs?
A company or trust needs a genuine, market rate rental contract with the property owner. The structure also affects which methods and expenses are available. A registered tax agent can help you set this up correctly.
This article is general information only and is not tax or financial advice. Tax rules change and your circumstances may differ. Speak with a registered tax agent or accountant before making claims.