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Guide to Home Office Deductions

The need to have a fixed place of business outside the home is no longer as important as it was once with the advent of cloud technology. As a result, many business owners are favouring to operate their business from home. A good café is a far more comfortable and welcoming environment for meeting your clients than a formal little serviced office.

You can run your business from home in comfort, but there are all sorts of problems from doing this.

  • What are the home costs that I can claim as a tax deduction?
  • How do I divide expenditures that are part private and part business?
  • Are the kilometres my car ran when I used it for business related trips during the year deductible?

Here are the do’s and don’ts for claiming home deductions to help business owners make sense of expenditures that would typically be considered as non-deductible, or private:

Household Costs

These types of expenses are referred to as occupancy expenses by the ATO. The items included in this category are: rent payment, or if the house is yours, items like home and contents insurance, interest on your mortgage, and council rates. The list can be further expanded to include utilities such as the electricity, water, gas, telephone and internet.

Do file a claim “occupancy expenses”

Before filing a claim for all of your rent in your next tax return, take note of some of these important rules.

First, an actual Home Office must be set up. Working with your laptop sitting on the sofa in front of the TV does not qualify. You need to have a space in your home that is strictly used to operate your business.

Don’t file a claim for the kitchen sink (or the floor area that is not used for your business)

Second (and the most important), you must apportion your home costs using either of these two methods: (1) your home office’s floor area or (2) the actual usage based on which cost you want to claim.

The calculation for claiming occupancy costs based on the floor area of your home office is as follows:

(Floor Area of your home office)    x   $ amount of the expense
(Floor Area of your entire house)

Here is an example: If my home is 200 square metres and my 5 square metre bedroom has been allocated as a home office, I can file a tax deduction of 2.5% of my rent and other occupancy costs in my business’s income tax return.

Do divide up your expenditures

Normally, some costs will have a greater business use percentage than that computed using the floor area method. For instance, you may be using your home internet and your mobile phone closer to 90% (perhaps 100%) of the time for business, hence utilising this method would greatly trim down the deduction that you can claim.

For this situation, you can establish a fair estimate using the actual usage method. If you estimate that you are using your home internet for business 75% of the time out of the total hours consumed, you can file a claim for that percentage of your monthly internet bill as a tax deduction.

So which method is appropriate for each type of home cost? The answer is: the method that will bring in the greatest deduction portion and will not give your problems in case the ATO asks for proof.

Do pick the method that gives the highest deduction

Normally, occupancy expenses will be best claimed using the floor area method. For other home expenditures, the most appropriate is usually the actual usage method.

In case the above seems difficult to deal with, the ATO lets you claim extra electricity and any furniture used with a flat rate deduction for home office costs. The rate for this deduction is $0.45 hourly for each hour consumed working at home.

If you are considering claiming home office costs on a house you own, don’t forget the possibility of Capital Gains Tax (CGT) concerns that occur due to utilising your primary place of residence to run a business.

Motor Vehicle Costs

When you have set up your residence as a home office, trips to attend to business related tasks such as visiting works and meeting with clients qualify as tax deductible.

The rules for claiming motor vehicle costs for business owners are similar to those set for employees.

The ATO allows claims of as much as 5,000 work related kilometres per car in a particular year with no logbook. All your motor vehicle costs such as registration, fuel, maintenance, insurance, depreciation, etc. should be covered under this deduction.

If the number exceeds the given amount, business owners must maintain a logbook for a 12 week period, which should start in the financial year they want to file a claim.

The actual “Do”

The most important tip you should take from this article is to never forget to come up with fair estimates with supporting evidence when you file a claim. This tip not only applies to home office expenditures but to all aspects of tax as well.

If you are fair with the ATO, they will typically treat you with fairness in return! Contact PJS Accountants for tax advice or guidance. We offer expertise in managing your tax affairs with a full range of compliance, corporate and individual tax services, whether you are a large company, SME, family business or individual. Tax laws and requirements change constantly, potentially putting you or your businesses at risk. Have a chat with one of our expert advisers now and ensure you are always compliant with ATO rules.