By Max Newnham
Despite the income limit definition of a small business entity increasing from $2 million a year to $10 million a year from July 1, 2016, the income test for accessing the small business capital gains tax (CGT) concessions remains at $2 million.
There are in fact two ways that business owners can meet the definition of a small business to receive the CGT concessions. If a business fails the $2 million turnover test, the owners can still qualify if their net assets are valued at less than $6 million.
One of the main benefits of the small business CGT concessions is the ability, as long as the business is not operated through a company or a unit trust, to access the 50 per cent active asset discount. This can be extremely advantageous when business owners have a property that is used for both business and personal reasons.
When a home, or the property where the home is located, can be classed as business premises, a tax deduction can be claimed for such things as interest on loans related to the business portion of the property or premises, and also for running costs such as electricity, gas and telephone.
In some cases, the business portion of a property is separate from the owners’ home. This could be when part of the property is used for storage of equipment, or there is an office, factory or storage facility separate from the home. When this is not the case, there are strict rules related to classing a portion of a home as being used for business purposes.
These rules include the business portion of the home having a separate entrance, and the portion used for business cannot also be used for private purposes. In other words, a large office open area that has a separate entrance, which also doubles as a family living room, would not qualify as business premises.
One of the downsides of having a portion of a home classed as business premises is that CGT could be payable when the home is sold. This will not be a problem if the business owners qualify for the small business CGT concessions, which can in effect result in no tax being paid on the gain associated with the business premises.
Q. I was thinking of starting an online business from my parents’ home. I don’t have a dedicated space to use as an office, just my bedroom, which has a table. If my parents decided to sell the house, would they need to pay CGT or is it exempt due to it being their main residence?
A. Your parents have nothing to fear from you operating your start-up business from the bedroom in their home. Under the strict rules relating to classifying a portion of a home as being used for business purposes, the corner of your bedroom would not qualify.
This means you can’t claim any portion of the running costs of your parents’ home, but you could claim such costs as the business use percentage of your mobile phone, and any assets such as computers purchased.
Source: The Age
