• Running expenses

    Running expenses are the increased costs of using facilities within your home because of your business activities.

    Running expenses include:

    • the cost of using a room, such as electricity and gas costs for heating, cooling and lighting
    • business phone costs
    • the decline in value of plant and equipment, such as chairs, bookcases, computers, grinders
    • the decline in value of furniture and furnishings, such as curtains, carpets, light fittings
    • the cost of repairs to furniture and furnishings
    • cleaning costs.

    If you work at or from your home, you can claim a deduction for additional expenses you incur in running your business. This means you must often work out the portion of the expense that relates to business and private use to work out how much you can claim; see Example: separating business and private expenses.

    There are a number of options for working out your claim for running expenses.

    If you are eligible to claim your running expenses only, you will not incur CGT if you sell your home.

    How much you can claim

    You can claim the additional expenses you incur because you carry on a home-based business, such as, additional electricity, heating or cooling costs (utilities), additional cleaning costs or additional phone expenses.

    Using your floor area may also be an appropriate way of working out some running expenses. For example, if the floor area of your home office is 10% of the total area of your home, you can claim 10% of heating costs.

    Where you do not have an area of your home set aside exclusively for business, you cannot claim on a floor area basis as this area is also used for non-business purposes. In this case, you must show how you arrived at the amount you are claiming. Some other basis may be appropriate. For example, you can compare utility accounts from before and after you started business to assess increased costs.

    How you work out these additional costs is up to you, but you should be able to provide enough information to show:

    • your claim is reasonable
    • you have excluded the private (domestic) proportion of expenses associated with normal living costs.

    We also accept the following methods for working out how much of your expenses are for business purposes.

    Keeping a diary

    You can keep a diary that shows how you use your home work area for a representative four-week period each financial year to work out a pattern of use for your home work area for the entire year. You must allow for periods such as holidays and illnesses.

    If there is no regular pattern to how you use your home work area, you must keep records of each time you use the area during the year and the purpose for which it is used.

    You must keep a diary for each financial year.

    Claiming 45 cents per hour

    Instead of recording actual expenses for heating, cooling, lighting and furniture depreciation (such as desks and shelves), you can claim a deduction of 45 cents per hour based on actual use or an established pattern of use. This rate is based on average energy costs and the value of common furniture items used in home work areas.

    You must separately work out all other home work area expenses, such as phone expenses and depreciation on computers or other equipment.

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

    See also:

    Utilities (gas, electricity)

    These expenses may be apportioned. If the business percentage is based on anything other than the floor area (for example, on actual electricity use) you must document your claim to show how you arrived at the amount.

    You can only claim a deduction for expenses you incur as additional running costs because of your business activities. For example, if you work in a room where other family members are watching television, it's unlikely you will have additional heating costs as a result of that work activity.

    Your business use of the home work area must also be substantial and not merely incidental. For example, you cannot claim 24 hours per day running costs simply because your fax machine is on all the time to receive business faxes.

    Phone

    If you use a phone exclusively for business, you can claim a deduction for the phone rental and calls, but not the cost of installing the phone. The installation cost is a capital expense.

    If you use a phone for both business and private calls, you can claim a deduction for business calls and part of the rental costs. Use the following formula to work out the percentage of phone rental expenses you can claim.

    Number of business calls you made and received
    Number of total calls made and received

    X

    100

    You can identify business calls from an itemised phone account. If you do not have an itemised account, you can keep a record for a representative four-week period to work out a pattern of business calls for the entire year, provided you have a regular pattern of use throughout the year.

    What deductions can you claim for a decline in value?

    You may be able to claim a deduction for the decline in value of your depreciating 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 of depreciating assets include:

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

    If you use your depreciating asset solely for business purposes, you can claim a full deduction for the decline in value. However, if you also use the depreciating asset for non-business purposes, you must reduce the deduction for decline in value by an amount that reflects this non-business use; see Example: separating business and private expenses.

    You work out the amount of deductions you can claim for decline in value of your assets based on an estimate of the percentage of your business use of those assets. You can base this estimate on a diary record of your business and non-business asset use for a representative four-week period. Your diary record must show:

    • what the asset was used for
    • whether the asset was used for business or non-business purposes
    • the period the asset was used for.

    Most businesses work out the deductions they can claim for decline in value under the uniform capital allowance system. However, if you have less than $2 million turnover you can choose to use the simplified depreciation rules, which is an easier and more generous method. Using the simplified depreciation rules, you can:

    • immediately write off most depreciating assets that cost less than $20,000 each (the current instant asset write-off threshold)
    • pool most other depreciating assets (those with a cost equal to or more than the current instant asset write-off threshold) and claim:
      • a 15% deduction in the year you buy them
      • a 30% deduction each year after the first year
       
    • deduct the balance of your small business pool at the end of the income year if the balance at that time (before applying the depreciation deductions) is less than the instant asset write-off threshold.

    Next step:

    See also:

    Example: Separating business and private expenses

    Alex (sole trader)

    Alex bought a computer to use in his business. However, his son also uses the computer to play computer games.

    Alex estimates his son uses the computer 20% of the time and he uses it 80% of the time for business. This means Alex can claim 80% of the computer's decline in value as a deduction.

    Alex can also claim only 80% of the GST he paid in the price of the computer as a GST credit.

    Examples: Claiming running expenses

    Pam (company)

    Pam operates a company from home. There are three ways the company can work out its deductions.

    Option 1 – Actual running expenses

    The company has the following home office running expenses, including energy expenses worked out using electricity hourly costs per appliance. Pam works out the business related expenses based on diary entries for a representative four-week period.

    Item

    Calculation

    Deduction for this year

    Deduction for future years (assuming similar use)

    Decline in value of desk

    Cost $1,333 over 20 years

    $66.65

    $66.65

    Decline in value of chair

    Cost $266 over 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

    0.7c per hour for 30 hours a week for 48 weeks

    $10.08

    $10.08

    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

     

    $261.73

    $261.73

    Option 2 – Estimated running expenses

    The company has the option of using a simpler method of working out its expenses, as shown below. Running expenses include the decline of value of furniture and other costs, such as electricity.

    Item

    Calculation

    Deduction for this year

    Deduction for future years (assuming similar use)

    Running expenses

    45c per hour for 30 hours each week for 48 weeks

    $648.00

    $648.00

    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 desk and chair cost less than $20,000 each and were purchased during this year, the company can claim the full $1,599 ($1,333 + $266) in the current year.

     

    Item

    Calculation

    Deduction for this year

    Deduction for next year

    Decline in value of desk

    Cost $1,333 

    $1,333.00

    Nil

    Decline in value of chair

    Cost $266 (can be claimed immediately)

    $266.00

    Nil

    Electricity for 100W lamp

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

    $14.40

    $14.40

    Electricity for 60W ceiling light

    0.7c per hour for 30 hours a week for 48 weeks

    $10.08

    $10.08

    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

     

    $1,767.48

    $168.48

    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 both running expenses and 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.

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

    • gas
    • electricity
    • house insurance premiums
    • council rates.

    If he had a mortgage, he could also claim 10% of the mortgage interest.

    Alex has a mobile phone that he uses exclusively for business calls but he also uses his home phone for some business calls. Alex can claim the cost of all his mobile calls. Based on a review of his itemised home phone bills, Alex estimates that 20% of calls from his house are for business purposes. So, he can claim 20% of his total call costs and line rental fees for his home phone.

    Alex can also claim deductions for the decline in value of the depreciating business equipment in his workshop.

    Vinh and Barbara (partnership)

    Vinh and Barbara are carrying on a business from their living room. They do not have an area set aside exclusively for their business, so they cannot claim occupancy expenses such as their rental payments. However, they can claim running expenses associated with carrying on their home-based business, such as phone, internet, gas and electricity, and also the decline in value of their computer.

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

    In producing their business income, they incur additional electricity and gas costs. To work out the extra costs, they keep a diary for four weeks to work out their business use pattern for the entire year. They then use this pattern to work out the gas and electricity costs they can claim. As Vinh and Barbara use the computer solely for their business, they can fully claim the computer's decline in value. They can also claim the cost of their internet connection.

    Vinh and Barbara cannot claim gas and electricity costs for times when others are also using the living room.

    End of example
      Last modified: 14 Sep 2016QC 17502