Are you a home-based business owner worried about missing out on tax deductions?
A home-based business offers many advantages, such as reduced commuting time and lower operational costs.
Plus it also offers flexibility and convenience, but it also comes with unique tax considerations.
This blog will explain the tax deductions available to home-based businesses in Australia, helping you maximise your return and keep more money in your pocket.
What Qualifies As A Home-Based Business?
Not everyone who works from home qualifies for deductions. To claim home office expenses, you must have a dedicated workspace that is:
- Exclusive for business use: This area shouldn’t be suitable for personal use and should have clear business functionality.
- Regularly used: You should use this space on a regular basis for conducting business activities.
What Expenses Can Be Deducted?
There are two main categories of home office deductions: occupancy expenses and running expenses.
Let’s have a quick look at them.
Occupancy Expenses (Sole Traders & Partnerships Only)
These deductions apply to the portion of your home used for business purposes. They can only be claimed if your business passes the interest deductibility test. This test ensures the space is genuinely used for business and not simply a convenient location.
| Occupancy Expense | Description |
|---|---|
| Mortgage Interest or Rent | The interest portion of your mortgage payment or rent for the dedicated workspace. |
| Council Rates | A portion of your council rates based on the size of the dedicated workspaced |
| Land Taxes | A portion of your land taxes based on the size of the dedicated workspace. |
| Home and Contents Insurance | A portion of your home and contents insurance premium based on the size of the dedicated workspace. |
Running Expenses (All Business Structures)
These deductions cover the additional costs of running your business from home.
| Running Expense | Description |
|---|---|
| Electricity and Gas | Increased costs of heating, cooling, and lighting due to business use of the dedicated workspace. |
| Phone and Internet | The cost of phone and internet services used exclusively for business purposes. Mobile phone and internet expenses are generally treated differently. |
| Decline in Value of Assets | The decline in value (depreciation) of business assets used in the home office, such as computers, furniture, and equipment. |
| Repairs and Cleaning | The cost of repairs and cleaning specifically related to the dedicated workspace. |
Calculation Methods For Running Expenses
For the 2023-24 income year, you can use one of two methods to calculate your running expenses:
- Fixed Rate Method: You can claim 67 cents per work hour for expenses like electricity, gas, stationery, and internet usage. This method simplifies record-keeping but doesn’t allow for additional claims on these expenses.
- Actual Expenses Method: You can claim the actual expenses incurred while working from home. This requires more detailed record-keeping but may result in a higher deduction.
Regardless of the method chosen, you can separately claim deductions for the decline in value of depreciating assets like laptops and office furniture.
Motor Vehicle Expenses
If you use your personal vehicle for business purposes, you can claim deductions for trips between your home and other locations for business reasons.
These may include:
- Visiting clients
- Purchasing supplies
- Trips to the post office for business mail
- Visiting your tax or BAS agent
You can use either the cents per kilometre method or the logbook method to claim these expenses. Deductible costs include fuel, repairs, insurance, and depreciation.
Special Considerations For Different Business Structures
Sole Traders And Partnerships
Sole traders and partnerships can claim both occupancy and running expenses, provided they meet the necessary criteria.
Companies And Trusts
If your home-based business operates as a company or trust, the situation is slightly different:
- The business should have a market-rate rental agreement with the property owner.
- The rental agreement determines which expenses the business can claim.
- Without a proper rental contract, there may be tax implications for both you and the business.
- If the business pays for your personal expenses, it may be subject to Fringe Benefits Tax (FBT).
Record Keeping
Regardless of your business structure or claiming method, it’s crucial to maintain accurate records for at least five years. This includes:
- Receipts for expenses
- Logbooks for vehicle use
- Time records for hours worked from home
- Any rental agreements between you and your business
Tax Depreciation Incentives
You may be eligible for immediate deductions or accelerated depreciation rates for certain assets under current tax depreciation incentives. These can significantly impact your tax position, so it’s worth investigating their applicability to your situation
Personal Services Income (PSI) Rules
If your business income is mainly from your personal efforts, skills, or expertise, PSI rules may apply. These rules can limit your ability to claim certain deductions, particularly occupancy expenses.
Get Expert Help With Your Home-Based Business Taxes
Understanding and claiming the right tax deductions for your home-based business can be complicated. At KPG Taxation, we specialise in helping home-based business owners like you navigate the complex world of tax deductions.
Our team of experienced tax professionals can review your specific situation to identify all eligible deductions, help you choose the best method for calculating your expenses, ensure you’re complying with all relevant tax laws and regulations, assist with proper record-keeping to support your claims, and maximise your tax benefits while minimising your risk of an audit.
Don’t leave money on the table or risk making costly mistakes with your taxes. Contact KPG Taxation today for a personalised consultation.
