If you work from home, the Australian Taxation Office (‘ATO’) now has you on their radar, so we are here to teach you more about your capital gains tax obligations.
What is capital gains tax and how does it affect you?
Capital gains tax is a tax payable when a gain is made on the sale of a capital asset, such as your home. Often, the sale of your home is exempt from paying capital gains tax, unless the home was subject to running a business. Therefore, the way in which your home office is set up, and how running and occupancy expenses are claimed, will govern the amount of capital gains tax, if any, you will need to pay.
There are generally three ways in which you can claim a tax deduction for running and occupancy expenses:
Use the ATO set rate:
You can use the ATO set rate of thirty-four cents per hour, which covers gas, electricity and office furniture. This method is used if you do not have a home office set aside exclusively for your business. Essentially, you can work from any room in the home, if no other individual is using the room at the same time as you are. Under this method, occupancy expenses including water, interest on your mortgage and rates will not be tax deductible and your home will usually not be subject to capital gains tax.
Actual running costs:
If you do not have a home office set aside for your business, you can work out the actual hourly cost of your gas and electricity in the room you are working in. You are also eligible to claim the actual cost of your office furniture. However, you are not able to claim home occupancy expenses and your home will usually not be subject to capital gains tax.
Claiming occupancy and running expenses using the floor area of your home:
To be considered eligible for this method, you must pass the ‘Interest Deductibility Test’. This means that you must have part of your home set aside exclusively as a place of business and it must be clearly identifiable as such. As a result, you will then be able to claim occupancy expenses such as water, interest on your mortgage, rates and rent based on the floor area of your home office.
In terms of running expenses, such as gas and electricity, you can use the floor area of your home office to formulate an estimate or you can calculate the actual cost per hour.
If you are entitled to claim home occupancy expenses on a floor area basis, then a portion of your home will be subject to capital gains tax. However, there is a catch – many small business owners believe that if they avoid claiming home occupancy expenses in their tax return, then they will avoid exposing their family home to capital gains tax; but this is not the case. Unfortunately, if you pass the Interest Deductibility Test, then the ATO can coerce you into paying capital gains tax, even though you have not claimed any expenses as a tax deduction.
Tips to consider if you run a business from home:
- We suggest that you get a valuation on your home as soon as you begin using a room to run your business and then get another valuation when you stop using that room to run your business. If you fail to do so, the ATO will average out your capital gain over the period you owned your home, and this may result in you paying tax on a larger capital gain.
- Come in and talk to one of our MPT advisors to find out how we can claim your home office expenses. We can discuss whether it is worth subjecting your home to capital gains or whether it is favourable to share your home office with family and claim the thirty-four cents per hour as a tax deduction.
- If you are using the floor area to claim your expenses, ensure it is accurate and not an estimate. We cannot stress enough that the ATO will expect to see the exact measurements.