Occupancy expenses are those expenses you pay to own, rent or use your home, even if you are not carrying on a home-based business. Occupancy expenses include:
- rent or mortgage interest
- council rates
- land taxes
- house insurance premiums.
You must pass the interest deductibility test before you can claim occupancy expenses. This means you must have an area of your home set aside exclusively for your business activities, such as an office or workshop.
Interest deductibility test
You use the interest deductibility test to work out if you are entitled to claim occupancy expenses (including mortgage interest) as a deduction.
To claim a deduction for part of the interest you pay on money you borrowed to buy your home, the area you have set aside must have the character of a place of business, for example, a hairdresser's home salon, a caterer's home kitchen or a photographer's home studio. While this will depend on your particular circumstances, an area of your home is likely to have the character of a place of business if it is:
- 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.
If you satisfy the interest deductibility test, you must account for any capital gain you make when you sell your home. You may satisfy the interest deductibility test even if you did not:
- borrow money to buy your home; you must apply the test on the assumption that you did borrow money to buy the home
- claim mortgage interest as a deduction.
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.
A common method of working out how much to claim is to use the floor area you use for your business as a proportion of the 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, using the floor area of your home as the basis of your claim may not be the best method of working out how much to claim. For example, the value of a large workshop near the house may be a small proportion of the overall value of the property. In these circumstances, 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.
Example: Occupancy expenses
Alex (sole trader)
Alex operates an electrical business from his home. He does some work in a workshop attached to his house and some at his clients' premises. Alex's workshop covers 10% of the floor area of his home.
Alex can claim occupancy expenses because he:
- is carrying on a business from his home
- has an area with the character of a place of business set aside exclusively for business.
Alex's work area 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