Home-based business

 

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Deductions for occupancy |  Running expenses |  Motor vehicles |  No specific work area

You might be sick of the daily commute, or want more flexibility of hours – or it could be that you have a talent or skill that will translate into a fulfilling career in your own business. If working from home seems to offer you a work/life balance (to have your cake and eat it too) there just may be icing for that cake in the form of tax advantages.

Home-based work lets you be your own boss, and make a living on your own terms. But the other side of making money is not spending more than you have to, so knowing which tax savings you are entitled to can be a great help in making a home-based business a success.

The deductible expenses that crop up from working at home can be viewed as being:

• 'occupancy' expenses
• 'running' expenses
• vehicle expenses.

Deductions for occupancy
These relate to expenses for using the home obviously, but not necessarily directly tied to the business itself. These can be rental costs, perhaps mortgage interest if you qualify, council rates or insurance premiums.

To be able to deduct a part of your mortgage interest bill, you have to pass what the Tax Office calls the 'interest deductibility test'. To claim a deduction for any occupancy expense, the area you set aside for working needs to have the 'character of a place of business'.

In other words, it needs to look like 'Hilda's Hair Salon', 'Clive's Catering', 'Andrew's Accounting' or a place that offers whatever product or service your home-based business is involved in. Putting up a sign will help, but it is also necessary to have the actual business area well defined.

You can generally claim the same percentage of occupancy expenses as the percentage area of your home that is used to make income (for example, if your home office is 10% of the total area of your home, then you can claim 10% rent costs, council rates and so on). However if you opt to claim occupancy expenses, especially mortgage interest, you'll be expected to account for any capital gain attributable to the business area of the home when you sell the house.

Running expenses
You can generally view running expenses as those costs that result from you using facilities in your home to help run the business, so these would include electricity, gas, phone bills and perhaps cleaning costs. But again you can only claim a deduction for the amount of usage from the business, not general household expenses.

Immediate write-off for purchase of motor vehicle from 2012-13
From 1 July 2012, small business entities (with a turnover of less than $2 million) will be able to:

• instantly write-off the first $5,000 of a new or used motor vehicle, and
• immediately write off each eligible business asset they buy costing less than $6,500 per asset.

The remainder of the value of any vehicle purchased to which the $5,000 immediate deduction applies would be included in a general business pool (depreciated at 15% in the first year then 30% thereafter).

Motor vehicles
Unlike most employees, home-based workers can generally claim a deduction for travel costs where this is business-related. This means that you may be able to claim, for example, the cost of going to a client's premises, or travel to buy equipment or supplies, or going out to do banking, seeing your accountant or other business-related activity. With all of the above, it is essential to document everything – keep receipts and invoices, fuel dockets and other notices.

No specific work area
You may still make a living from home, but don't have a particular area set aside primarily or exclusively for these income-producing activities. Mabel's Macrame Magic, for example, could see Mabel making her creations next to the radio one day, on the front porch another day, or at the kitchen table while keeping an eye on the stove.

There is no defined area from which a business is conducted, but Mabel can still claim deductions for utility usage such as gas or electricity. She just needs to apportion expenses and be able to show how she reached these amounts. Then there are phone costs for business use, and even the decline on value of 'plant and equipment' (chair, desk, computer). She will however be unable to make any claims based on renting or owning the house, and also rates or insurance.

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