Your home office and capital gains tax
Do you work from home? With a growing number of home-based businesses, the tax office now has you on their radar, so know your capital gains tax.
What is capital gains tax and why do you need to know about it?
Capital gains tax is a tax payable when a gain is made on the sale of a capital asset, such as your home.
Generally the sale of your home will be exempt from paying capital gains tax, unless your home was used to run a business. Where this is the case, the way you set up your home office and claimed running and occupancy expenses will determine how much capital gains tax, if any, you’ll need to pay.
If you run a business and work from home there are generally three ways you can claim a tax deduction for running and occupancy expenses
1. You can use the ATO set rate of 34 cents per hour which covers gas, electricity and office furniture
"If the ATO come knocking they will expect to see exact measurements."
You would use this method where you don’t have a home office set aside exclusively for your business. You can be working from any room in the home as long as no other family member is using the room at the same time as you are. Under this method, occupancy expenses such as rates, water and interest on your mortgage will not be tax deductible and your home will generally not be subject to capital gains tax.
2. Actual running costs
If you don’t have a home office set aside exclusively for your business, instead of using the ATO rate of 34 cents you can work out the actual hourly cost of your electricity and gas in the room you’re working in. You will also be able to claim the actual cost of your office furniture. You won’t, however, be able to claim home occupancy expenses, and your home will generally not be subject to capital gains tax..
3. Claiming occupancy and running expenses using the floor area of your home
To use this method you must pass what’s called ‘The Interest Deductibility Test’. To pass the interest deductibility test you must have part of your home set aside exclusively as a place of business and it must be clearly identifiable as such. You may then be able to claim occupancy expenses such as rates, water, interest on your mortgage, and rent based on the floor area of your home office.
For running expenses such as electricity and gas you can use the floor area of your home office to make an estimate, or you can calculate the actual cost per hour.
If you’re eligible to claim home occupancy expenses on a floor area basis, then a portion of your house will be subject to capital gains tax. But here’s the catch; many small business owners believe if they don’t claim any home occupancy expenses in their tax return they will avoid subjecting their family home to capital gains tax. Not true. Unfortunately if you pass the interest deductibility test the Tax Office can force you to pay capital gains tax regardless of the fact you haven’t claimed any expenses as a tax deduction.
If you run a business from home, consider the following points:
Get a valuation on your home as soon as you start using a separate room to run your business. Get another valuation when you stop using that room or you cease business. If you don’t do this then the ATO will average out your capital gain over the period you owned your home, and this could result in you paying tax on a much larger capital gain.
- Talk to your accountant. Find out how they are claiming your home office expenses. Discuss whether it’s worth subjecting your house to capital gains or whether you may be better off sharing your home office with family, and claiming 34 cents per hour as a tax deduction.
- If using the floor area to claim your expenses, make sure it’s accurate and not just a guess. If the ATO come knocking they will expect to see exact measurements.
- Not everything revolves around tax. A separate area to run your business and shut yourself away is imperative for some people regardless of the fact that it may result in a capital gain.
As you can see, capital gains tax is a comprehensive area, but if you know your ‘gains’ you’ll avoid a loss.
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