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  • Deductions for a sole trader or partnership home-based business

    You may be able to claim a deduction for the occupancy and running expenses for the area of your home that is used for business purposes:

    See also:

    Occupancy expenses

    Occupancy expenses are those you pay to own, rent or use your home. They include:

    • mortgage interest or rent
    • council rates
    • land taxes
    • house and contents insurance premiums.

    If you run a home-based business, you may be able to claim a share of your occupancy expenses that relate to your business.

    To be eligible to claim a deduction for occupancy expenses you must pass the interest deductibility test.

    If you are eligible to claim occupancy expenses, you will also be able to claim running expenses.

    If personal services income rules (PSI) apply to your business, you may not be able to claim occupancy expenses

    Find out about:

    Interest deductibility test

    To pass the interest deductibility test, the area you have set aside in your home for your business must have the character of a place of business.

    Indicators that an area of your home has the character of a place of business include that it's:

    • clearly identifiable as a place of business, for example, you have a sign identifying your business at the front of your house
    • not readily suitable or adaptable for private or domestic purposes
    • used exclusively or almost exclusively for carrying on your business
    • used regularly for visits by your clients.

    Examples of businesses that may pass the interest deductibility test include:

    • hairdresser's home salon
    • caterer's home kitchen
    • photographer's home studio.

    If you pass the interest deductibility test, you may have to pay tax on any capital gains you make when you sell your home. This applies even if you didn't:

    • borrow money to buy your home
    • claim a deduction for mortgage interest as an occupancy expense.

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    How much you can claim

    You can claim the percentage of occupancy expenses that relates to the area of your home you use as a place of business and the proportion of the year it was used for business.

    A common method of working out how much to claim is to work out the floor area you use for your business as a percentage of the total floor area of your whole home. For example, if the floor area of your home office is 10% of the total area of your home, you can claim 10% of your rent or mortgage interest, council rates and insurance.

    In some circumstances, you may not be able to work out the floor area of your home that is used for your business. We will accept an alternative method of working out how much of your home you use for business purposes, as long as the method you use is reasonable and based on accurate information.

    Make sure you keep accurate records of how you worked out the occupancy expenses you claim as deductions.

    If you’re a sole trader with simple tax affairs, you can use the myDeductions tool in the ATO app to record your expenses.

    Find out about:

    See also:

    Example: Occupancy expenses

    Alex is a sole trader operating an electrical business from his home. He does some of his work in a workshop attached to his house.

    As this workshop is used almost exclusively for his electrical business, Alex passes the interest deductibility test.

    Alex uses the personal services income toolThis link opens in a new window on our website to work out that the PSI rules do not apply to his income.

    Therefore, Alex can claim occupancy expenses.

    Alex's workshop covers 10% of the floor area of his home, so he can claim deductions for 10% of his costs for:

    • mortgage interest
    • house insurance premiums
    • council rates.

    Alex can also claim running expenses.

    End of example

    Running expenses

    Running expenses are the increased costs of using your home's facilities for your business activities.

    You can claim running expenses if you run your business from home, such as in a separate study or a desk in a lounge room, even if it doesn’t have the character of a ‘place of business’.

    You can't claim a deduction for the private use of your home's facilities.

    To claim a deduction for running expenses you need to work out the portion of the expense that relates to business use.

    There are a number of ways to work out your running expenses.

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    What running expenses are

    Running expenses include:

    • electricity and gas costs for heating, cooling and lighting a room
    • landline phone and internet service costs for your business (mobile phone and internet costs are dealt with separately as assets or operating expenses)
    • the decline in value and cost of repairs to
      • plant and equipment, such as computers, fixed tools and machinery
      • furniture, for example, chairs, desks and bookcases
      • furnishings, such as curtains, carpets, light fittings
       
    • cleaning costs.

    How to calculate your claim

    You can use any method to calculate your running expenses, as long as:

    • it's reasonable in your circumstances
    • you exclude the percentage of costs for your private (normal) living costs
    • you have records to show how you calculated the expense.

    Your business use of the home business area must be substantial and not incidental. For example, you can't claim electricity costs 24 hours per day simply because your fax machine is always on to receive business faxes.

    Pattern of use

    For some expenses, you may be able to claim based on your pattern of use, rather than your actual use.

    To work out your pattern of use, you need to keep a diary for a representative four-week period that shows how you use your home work area. You can then apply this as a pattern of use for the whole year. However don't forget to exclude periods when you were on holidays or not working due to illness.

    You must keep a diary for each financial year.

    If there's no regular pattern of how you use your home work area, you must keep records of:

    • each time you use the area during the year
    • what the area was used for.

    Floor area

    The floor area method is often the most appropriate way of working out some of your running expenses. You can separate your expenses based on:

    • the proportion of the floor area of your home that you use for your business
    • the proportion of the year that you used it for business.

    This method may be appropriate for expenses relating to:

    • electricity
    • gas
    • cleaning.

    You can only claim on floor area basis if you have an area of your home set aside exclusively for business.

    For example, if the floor area of your home office is 10% of the total area of your home, you can claim 10% of your running expenses.

    If the business percentage is based on anything other than the floor area (for example, on actual electricity use) you need to keep records, which show how you worked out the amount you are claiming.

    Hourly rate

    Instead of recording actual expenses for heating, cooling, lighting, cleaning and furniture depreciation, you can claim a deduction of 52 cents per hour based on either:

    • actual hourly use
    • an established pattern of hourly use.

    This rate has been worked out based on average energy costs and the value of common furniture items used in home-based businesses.

    You need to separately work out all other running expenses, such as phone expenses and depreciation on computers or other equipment.

    Landline phone and internet

    If you have a landline phone that you only use for your business, you can claim a deduction for all calls and rental costs.

    However, you can't claim for the cost of installing a landline – this is a capital expense.

    If you use a landline phone for both business and private calls, you can claim a deduction for the:

    • business calls
    • the business share of the rental costs.

    If you have an itemised phone bill, you can work out the business share of the rental costs you can claim by:

    • Counting the number of business calls you made and received.
    • Dividing it by the number of total calls made and received.

    For internet expenses, you can claim the proportion of time or data you used your internet for business uses.

    If you don't have an itemised bill you can keep a diary for a representative four-week period to work out your pattern of business calls or internet use throughout the year.

    Example: Working out the business use percentage of your bill

    Cleo received a monthly bill for $200 from her phone provider. From her itemised bill, Cleo worked out that, of the 300 calls she made in March 2018, 160 were directly related to her business.

    Cleo worked out her business use percentage as 160 ÷ 300 = 0.53. She then applied this rate to her $200 bill ($200 × 0.53 = $106). Therefore, Cleo can claim $106 as a deduction.

    End of example

    See also:

    Decline in value (depreciation) of assets

    A depreciating asset is an asset that has a limited effective life and can reasonably be expected to decline in value over the time it is used. Examples include:

    • computers
    • electrical tools
    • photocopiers
    • furnishings
    • carpet and curtains
    • motor vehicles.

    If your business has an aggregated turnover less than $50 million, you can choose to use the instant asset write-off. You can immediately deduct the business portion of certain assets that cost less than the threshold that applied when it was first used or installed and ready to use.

    If you can't use the instant asset write-off, you may be able to claim a deduction for the decline in value of your depreciating assets.

    If you use the asset only for business purposes, you can claim a full deduction for the decline in value. However, if you also use the depreciating asset for private purposes, you can only claim the business use percentage of the decline in value.

    You can estimate your business use percentage based on a diary record of your business and private use of the asset for a representative four-week period. Your diary record must show:

    • what the asset was used for
    • whether the use was for business or private purposes
    • the period the asset was used for.

    If you can claim a GST credit for a depreciating asset, you must first deduct the amount of the GST credit claim before working out the deduction for depreciation.

    See also:

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    Running expenses examples

    Example 1: Sole trader with no dedicated business premises

    Rocco is a sole trader plumber who doesn’t have a dedicated business premises. He travels to his clients’ houses each day from home.

    He does his bookkeeping in his dining room on a computer that he only uses for his business.

    Rocco keeps a diary for four weeks and finds that he spends, on average, two hours a day, five days a week (with four weeks of holidays a year) on his bookkeeping.

    Rocco claims:

    • running expenses using the fixed rate of 52 cents per hour for 10 hours a week for 48 weeks ($249.60)
    • the cost of his computer, as it cost less than $30,000 (the instant asset threshold that applied at the time he bought and installed it) and depreciation of computer equipment is not covered by the fixed rate.

    Rocco cannot claim:

    • occupancy expenses, as he does not have a dedicated area for his business.
    End of example

     

    Example 2: Different options for working out running expenses for a sole trader

    Pam operates a business as a sole trader from her home. She considers three different ways she can work out her deductions.

    Option 1 – Actual running expenses

    Pam's home-based business expenses for each item are shown in the following table. Pam has worked out the business-related expenses based on diary entries for a representative four-week period. She has excluded the four weeks holidays she takes per year.

    Running expenses using option 1, actual running expenses

    Item

    Cost

    Period of use

    Deduction for this year

    Deduction for future years (assuming similar use)

    Decline in value of desk

    Cost $1,333 over 20 years

    20 years

    $66.65

    $66.65

    Decline in value of chair

    Cost $266 over 10 years

    10 years

    $26.60

    $26.60

    Electricity for 100W lamp

    1c per hour for 30 hours a week for 48 weeks

    -

    $14.40

    $14.40

    Electricity for 60W ceiling light

    0.6c per hour for 30 hours a week for 48 weeks

    -

    $8.64

    $8.64

    Electricity for computer

    1c per hour for 30 hours a week for 48 weeks

    -

    $14.40

    $14.40

    Electricity for heating/cooling

    9c per hour for 30 hours a week for 48 weeks

    -

    $129.60

    $129.60

    Total deductible amount

    -

    -

    -$260.29

    -

    Option 2 – Hourly rate

    Pam has the option of using an hourly rate for her business-related running expenses. The hourly use is based on diary entries for a representative four-week period. Pam has excluded the four weeks holidays she takes each year.

    Running expenses using option 2, hourly rate

    Item

    Calculation

    Deduction for this year

    Deduction for future years (assuming similar use)

    Running expenses

    52c per hour for 30 hours each week for 48 weeks

    $749

    $749

    Option 3 – Actual running expenses using the simplified depreciation rules

    If the company is eligible to use the simplified depreciation rules, Pam can work out the company's deductions for decline in value under option 1 in a different way. For example, because the chair and desk cost less than $30,000 and was purchased during the year, the company can claim the full cost in the current year.

    Running expenses using option 3, using the simplified depreciation rules

    Item

    Cost

    Deduction

    Decline in value of desk

    $1,333

    $1,333 (instant asset write-off)

    Decline in value of chair

    $266

    $266 (instant asset write-off)

    Electricity for 100W lamp

    1c per hour for 30 hours a week for 48 weeks

    $14.40

    Electricity for 60W ceiling light

    0.6c per hour for 30 hours a week for 48 weeks

    $8.64

    Electricity for computer

    1c per hour for 30 hours a week for 48 weeks

    $14.40

    Electricity for heating/cooling

    9c per hour for 30 hours a week for 48 weeks

    $129.60

    Total deductible amount

    -

    $1,766.04

    Pam chooses to claim using Option 3.

    End of example

     

    Example 3: Claiming running expenses for a partnership

    Vinh and Barbara are partners operating a business from their living room. They don't have an area set aside exclusively for their business, so they can't claim occupancy expenses. However, they can claim running expenses associated with carrying on their home-based business, such as phone, internet, gas and electricity, and a deduction for their computer using the instant asset write-off.

    Vinh and Barbara have a separate phone line installed for their business. They can claim a deduction for their total phone rental and call expenses, but not for the installation.

    By operating their business from home they have additional electricity and gas expenses. They keep a diary for four weeks to work out their business use pattern and then apply if for the entire year. They then use this pattern to work out the percentage of gas and electricity expenses they can claim. However, they can't claim gas and electricity expenses for times when others also use the living room.

    As Vinh and Barbara only use the computer for their business, they can claim the full cost of the computer. As its purchase price was under the instant asset write-off threshold, they can claim the deduction immediately.

    They can also claim the ongoing cost of their internet connection.

    End of example
    Last modified: 19 Aug 2019QC 59276