When operating a home-based business, many owners are not aware of the lucrative depreciation deductions available. If you’re one of them, you may be missing out on thousands of dollars.
With improvements in technology and the convenience and flexibility that working from home provides, according to business.gov.au ‘nearly one million people [are] running a business from home [with] home-based businesses [now] a large part of the Australian business community’.
What expenses can I claim when working from home?
Substantial tax depreciation deductions are available to home-based business operators. The ATO allows owners of income-producing properties to claim depreciation deductions on both the structure of a building (capital works) and easily removable assets (plant and equipment).
When operating a home business, the same rules apply to the area of the home and the assets within it that are used solely for income-producing activities. Home based business operators can claim an apportioned tax deduction for use of home office utilities and business phone costs (not including phone installation). In some cases, you can also claim occupancy expenses including rent, mortgage interest, insurance and rates, but it’s best to consult your accountant to confirm if your specific business qualifies.
If you own your home, you can also depreciate a portion of the cost of your house that’s used to run the home-based business. Additionally, owners can deduct the cost of any repairs made directly to the office area.
Let’s look at a case study showing some of the available deductions and the significant difference claiming these deductions can have on a home-based business operator’s cash flow.
In the example above, the original value at purchase is shown for each item. Using the diminishing value method, BMT calculates the first-year deductions available would be $3,405 in total plant and equipment depreciation. Over five-years, depreciation deductions amount to $7,983.
Total capital works depreciation over the first year is $171 and over five years totals $854.
The owner of this small business home office can claim a total of $3,576 in tax depreciation deductions during the first year and $8,837 over a five-year timeframe, improving the cash flow of the business.
What are the rules?
For a home office to be eligible for tax depreciation deductions, there are three main rules stipulated by the Australian Tax Office (ATO) that must be complied with.
- You must operate your business from your home
- You must carry out income-producing work from home
- Expenses incurred must be in direct relation to using your home to operate your business.
Small businesses with turnover up to $10 million (from 1 July 2016) are eligible for an instant asset write-off of $30,000 for assets purchased from 2 April 2019 to 30 June 2020. Different instant asset write-off thresholds apply for purchases made before then.
In the example above, if the home business is a small business, all assets shown would be eligible for the instant asset write off.
Assets with a value above $30,000 can still be deducted over time using the small business pool. These assets can be claimed at a rate of 15% in the first year they were purchased and used or installed, then at 30% each year following. Once the asset value falls below $30,000, they can be instantly written off.
Capital gains tax (CGT) is the amount paid to the government when you sell an asset that has increased in value over time since you purchased it. Generally, a home is exempt from CGT, unless part of the home is income producing and you acquired your home on or after 20th September 1985 (when the tax on capital gains began).
According to the ATO, in most cases ‘you can ignore a capital gain or loss you make when you sell your home or main residence (under the main residence exemption).’
If you started using your home as your primary business location after 20 August 1996, you cannot claim ‘capital gains and the main residence exemption’ for the time prior to this date. You would then need to use the market value of your home from the date you started using it to produce income.
For this reason, it’s recommended you obtain a valuation on your home when you start operating a home business. Otherwise, you may find when you sell the property, you’re required to pay more in capital gains tax.
With your home-based business, you may also be eligible to apply for small business CGT concessions to reduce your capital gain.
What type of insurance do I need?
Operating a business from home can bring certain financial risk. Manage the risk with an appropriate level of insurance, as home and contents insurance is likely to only cover residential use, rather than activities relating to your business operations.
Depending on the type of business you’re operating, it’s wise to look at business-specific insurance. If you don’t already have insurance or you’re unsure if your insurance is adequate, contact BMT Insurance.
Operating a home-based business can be both exciting and daunting. The independence, lifestyle, flexibility and tax deductions can make it all worthwhile. To find out more about how depreciation deductions can help your home based business, Request a Quote or contact the expert team at BMT Tax Depreciation on 1300 728 726.