Home-based business and CGT implications

Example: apportionment of occupancy expenses

Elena and Mathew bought their home 10 years ago. Since then, Elena has used 10% of the floor area exclusively to run a home-based business. Elena generally runs her business for the full year.

Elena is entitled to claim a deduction for occupancy expenses. Elena and Mathew don't have a mortgage, but if they did, she would be able to claim a deduction for mortgage interest. As Mathew isn't involved in the business, he is not entitled to a deduction.

Elena apportions her occupancy expenses on a floor area basis to work out her deduction. Elena uses 10% of the home's floor area to run a home-based business, so she claims a deduction for 10% of her occupancy expenses.

If Elena continues to use her home in the same manner, and assuming they meet all eligibility conditions for the main residence exemption, Elena will apply the main residence exemption to disregard 90% of any capital gain or capital loss she makes from selling her home.

Elena can't apply the main residence exemption to disregard the remaining 10% of any capital gain or capital loss. However, she can apply the capital gains tax (CGT) discount to reduce any remaining capital gain.

As Mathew hasn’t used the house for the purpose of producing assessable income, he would be entitled to apply the full main residence exemption to disregard all of any capital gain or loss he makes from them selling their home.

Example: full main residence exemption

Olga is the sole owner of her home, which she bought 10 years ago.

Olga runs a digital marketing business as a sole trader. From the time she purchased her home, Olga has performed most of her work from her home office, where she also stores some physical business records. When Olga needs to meet clients in person, she visits their business premises.

When Olga isn’t using her home office for work, she and her partner James use the space to study. They both store personal items in the home office.

Olga doesn’t have an area of her home set aside and exclusively for business. Therefore, she isn’t entitled to claim a deduction for mortgage interest or other occupancy expenses.

If Olga meets all eligibility criteria for the main residence exemption, she can disregard any capital gain or capital loss she makes when she sells her home.

Example: partial main residence exemption, ineligible for the small business CGT concessions

Harriet owns a 3 bedroom, 2 bathroom home.

Harriet is employed part-time as a teacher's assistant. She also runs a hairdressing salon as a sole trader.

Since buying the home, she converted a bathroom into a salon to use in her business. She lives in the remainder of the home.

The salon occupies 7% of the total floor area of the home. Harriet sees clients in the salon for approximately 8 hours per week. She occasionally performs business admin, for convenience, in the loungeroom.

In this case, Harriet has an area of her home, the salon, set aside and used exclusively for business. Aside from the salon space, she has not used the home to produce income. She is now considering selling her home.

As Harriet uses part of the home exclusively to produce assessable income, she is entitled to a deduction for any occupancy expenses she incurs, including mortgage interest, to the extent that they relate to the portion of the home used to produce income (7%).

Provided Harriet meets all other eligibility criteria, she will be entitled to a partial main residence exemption (93%) when she sells her home. As she could deduct 7% of her occupancy expenses, she will not be entitled to disregard all of the capital gain, and will instead have proceeds equal to 7% of the gain.

Harriet can then apply the CGT discount to reduce any remaining capital gain.

However, Harriet cannot apply the small business CGT concessions as the property is not an active asset. When applying the active asset test, the whole of the asset must be considered, not just the portion used in the business. As the business-related use of the home is incidental to its overall private use, the home wouldn't be considered an active asset.

Example: partial main residence, eligible for the 15-year exemption

In 1990, Sue and Rob bought a 2-storey building as joint tenants. The building is on a small block facing the local esplanade and has neighbouring shops on each side.

From the time Sue and Rob bought the property, they have used:

• the ground floor of the building solely to run a takeaway and convenience store
• the top floor of the building solely as their main residence.

The ground and top floors of the building comprise 50% of its total floor area each.

Sue and Rob run the takeaway and convenience store business in partnership with each other and employ a few casual employees at any one time.

Sue and Rob have owned the property and run the business from it continuously since the time they bought it.

Sue and Rob are both over 55 years old and are considering retirement. Their retirement plan involves them selling the property and buying a beachfront apartment in the local area.

Given all the circumstances, the property will qualify as an active asset. If they meet all eligibility conditions, Sue and Rob will each be able to apply the small business 15-year exemption to disregard any capital gain they make on selling the property.

If the 15-year exemption applies, their entire capital gain will be disregarded and they will not need to consider the main residence exemption.