My home is my place of Zen ~ coming to terms with home office deductions

Posted 28 Jul '17

The advancements in technology coupled with our ever strengthening infrastructure has given us something like never before; the cloud environment. With this comes unprecedented levels of innovation and the business landscape has changed more than it has in the last 5 years than it has in the last 20.

Of particular note, our complex society has produced millennials; who are by their very definition more sophisticated, technology wise and driven to become entrepreneurs than ever before. However, every great success story has to start somewhere and often times, this is a place we are all quite familiar with; our homes.

As the end of the financial year is around the corner, now is a great time to revisit the concept of home offices and the various deductions that you are entitled to claim if you maintain one.

Home Offices

Generally, tax deductions are not normally allowable for your home expenses because they are private in nature. An exception to this rule is when you are either working from home in the course of carrying out your employment duties or if your home forms the base for your business operations. Over the years, the ATO have developed two classifications for ‘home offices’: a ‘place of convenience’ or a ‘place of business’. This then determines the eligible deductions you are able to claim for each classification.

Place of Convenience

Given the push for flexible working conditions and more employers offering work from home arrangements, there will be times you may need to carry out your employment duties from home. In these circumstances, it is likely that your home office is classified as a ‘place of convenience’. This is because you carry out work duties which could otherwise be done at your regular business offices. Common examples of this include:

A barrister who reads client briefs at home
A teacher who marks assignments and prepares lessons from home
An insurance broker who maintains clients’ files and occasionally interviews clients at his or her home office

Place of Business

On the other hand, if you are an entrepreneur and have your home as your base of your income producing operations, it can possibly be classified as a ‘place of business’. The aspects which the ATO have looked at over the years to determine whether a home office is a place of business include:

The size of the area and whether it is a clearly separate
If the area can be identified as a place of business
Whether the area is suitable or adaptable for use for private or domestic purposes
Whether the area is used exclusively for carrying on a business
The frequency of client and customer visits

Common examples of where a place of business exists for a home office include:
A doctor who operates a doctors surgery from their home
A hair dress with a portion of their home used as a salon
A professional sole trader who conducts meetings and business from home

What expenses can I claim?

There are two types of expenses related to maintaining a home office, running expenses and occupancy expenses. If your home office is classified as a ‘place of convenience’ then you are only able to claim running expenses. But if it is classified as a ‘place of business’ then you are able to claim the both running expenses and a portion of your occupancy expenses.

Running expenses

Running expenses are the expenses for use of the facilities in the home. In essence, the ATO recognise that for people who have a home office to work from, they have incurred additional expenditure to help them carry out their duties. Some example of running expenses include:

Lighting, cooling and heating expenses – expressed either a percentage of the home office by the total electricity expense or the ATO accepts 45 cents per hour worked from home
Decline in value of plant and equipment used in the home office – computers, printers, laptops, furniture, etc. If the cost is less than $300, then you are able to claim an immediate deduction for this
Repairs and maintenance – this however needs to be in relation to the specific area of the home office
Telephone and Internet – expressed as a percentage of work use (e.g. $60 per month x 12 months x 70% work use)

Occupancy expenses

Occupancy expenses are expenses relating the ownership of use of a home which are not affected by your income producing activities. These include:

Rent for your home
Interest on funds borrowed to acquire the home
Council rates
Water charges
Land taxes
Home insurance premiums

Generally, as only a portion of your home is used, the expenses need to be apportioned to adjust out the private component of the expenses. This is done with respect to the floor area, and in addition, the period of time the home was used as a ‘place of business’.

For example, if you had $10,000 in total occupancy expenses (interest, rates, water, etc.), the floor area of your home office represents 20% of your business and you started your business mid-way through the year, then the deductible portion would be:

($10,000 x 20% x [183 days / 365 days] = $1,000)

Capital gains tax (CGT) implications

It is important to note that if you have used your home partly or fully as a place of business, it will be subject to the CGT regime as the main residence exemption will not apply in full. Thus when you subsequently sell your home, you may need to pay tax on any capital gains you make from the sale. The calculation for this is expressed similarly to the calculation for claiming occupancy expenses which analyses the area of use and the period of time your home was used as a main residence. If it results in a capital loss, this loss is quarantined and carried forward to offset against any future capital gains.

Conclusion

So whether you are small business with its operations from home or an employee under a flexible working arrangement and working from home, contact us on 07 3124 0244 today to best maximise your home office deductions moving forward!

Leonard Jiang | CA, CTA, DFP
Senior Accountant

T +617 3124 0244 | E leonard@empireaccountants.com.au