By: Max Newnham
Don’t make this common mistake.
Many small businesses are often started on a part-time basis while the owner is working full-time. This can mean a portion of the owner’s home, or the property that the home is situated on, is often used for business purposes. A common mistake made is for owners to claim both the holding costs of a property and the running costs.
To claim a tax deduction for the holding costs of a home, including mortgage interest and council rates, the portion of a home used for business purposes must have a separate entrance and not be used for both business and private purposes.
his means even though an addition built as an office by a small business owner, with its own entrance, that can be entered from the home and part is used for private purposes, it will not qualify as business premises and holding costs cannot be claimed.
In this situation the only tax deduction allowed is for a home office and a claim made only for the running cost of the office. These running costs include electricity, gas, and telephone.
When a portion of the electricity, gas and telephone is claimed the business owner must be able to prove how they calculated the business use. One possible way is by showing what the cost of gas and electricity was before the business was run from the home, and what these costs have increased to since the business was started. For telephone costs a log book would need to be kept.
There can be a downside for business owners when they successfully class a portion of their home as business premises. When the property is sold the business portion of the selling value will be subject to capital gains tax and will not receive the principal residence CGT exemption.
Q. We run a small business from home through a company with me as director and my wife as an employee. We are undertaking some renovations in February. The builder has suggested that we “rent” elsewhere for 3-6 months as it would be a lot quieter if we move out. Are we able to maintain our residence as our principal place of residence and then rent elsewhere and claim the maximum permissible as a business expense?
A. Unfortunately my answer qualifies under the good news and bad news category. The good news is under capital gains tax law individuals can have a property classed as their residence even though they are not living in it, as long as they do not purchase another residence. In fact a residence can be rented for up to six years without the CGT exemption being lost.
This means by moving out for 3 to 6 months while the renovations are carried out you will not lose the CGT exemption.
The bad news is although you are moving to rented accommodation to run your business, because the rental property could not meet the business premises test, you will not be able to claim a portion of the rent as a business expense.
Source: The Sydney Morning Herald