Extract from ATO Website about Tax Basics for Small Business

Working from home

There are generally three ways to work from home. Although there are common deductions available in all three circumstances, the availability of some deductions will depend on the way you work from home.

A common situation is for you to work at home without a specific work area at home. In this situation, the home is not a place of business as there is no area set aside primarily for business activities. An example of this would be to do work in one of the living areas, say at the kitchen table.

Sometimes you may have a dedicated home work area or office. This means there is a room or area set aside primarily or exclusively for business activities, although the actual place of business is not at home.

Finally there is the situation where home is the place of business. In this situation, there will be an area set aside exclusively for business activities and the business is run primarily or exclusively from home.

If your home is not a place of business then one of the first two columns apply. You can generally claim deductions for additional expenses you incur. For example, the extra cost of business telephone calls, additional utilities costs (heating, gas, electricity) and the decline in value of business furniture and equipment.

I must emphasise that claims are for the additional costs incurred because you are conducting your business activities from your home. For example, if you undertake a work activity in a room where other family members are watching television, there may be no additional cost occasioned by that work activity.

If your home is your principal place of business, meaning the business is run primarily from home and there is an area set aside exclusively for business use, you can also generally claim a portion of the mortgage interest or rent, council rates, and insurance premiums..

I will go into more detail and an example for occupancy expenses next, but first I would like to mention that there are a number of sources and tools you can access to assist you with this calculation. They include:

  • Home office calculator available on ato.gov.au by searching for the quick code (QC 17079)
  • refer to Home-based business on ato.gov.au by searching for the quick code (QC 17502)
  • Individual tax return instructions 2013 on ato.gov.au by searching for the quick code (QC 32257)

Place of business at home

You must pass the interest deductibility test before you can claim occupancy expenses. Remember occupancy expenses are those expenses you pay to own, rent or use your home. Occupancy expenses include rent or mortgage interest, council rates and insurance premiums.

The interest deductibility test means you must have an area of your home set aside exclusively for your business activities for example, an office or workshop.

Even if you don’t have a mortgage, because you either rent or you’ve paid out your mortgage, you must still meet this test to claim any of the occupancy expenses listed on the slide. In other words, you will need to ‘pretend’ that you have a mortgage, and assess yourself against the interest deductibility test.

To meet the interest deductibility test, 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)
  • unsuitable for private or domestic purposes
  • used exclusively or almost exclusively for carrying on your business, or
  • used regularly by your clients.

You can claim the percentage of occupancy expenses that relate 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 could 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.