Personal Tax Specialists

Running A Business from Home Tax Benefits

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Whether you’re planning to start your business, have just become operational, or you have been running your business for a while, chances are that you may have considered the possibility of running your business from home. Maybe you realised that you have the space to successfully operate in your home, or you just like the idea of it. Either way, running a business from home can provide many benefits and boost profitability. Aside from saving you large amounts on office space, there are also many tax deductions that you can claim.

The Benefits Beyond the Tax

When you’re starting your business, you will want to minimize your overheads. Running operations from home is a good way of building yourself up before scaling. You’re able to immediately save on typical overheads such as rent, utilities, and office expenses. 

Operating your business as a home-based entity allows you the freedom to operate during the hours that best suit you. While this does need to be clearly communicated with your clients, you have the freedom of getting a jump start on admin even before dawn, if you so choose.

Eliminating heavy commutes, the time it takes to prepare and get ready for the day, and the oddities that we never realised were setting us back before the pandemic, you have the pleasant surprise of finding a few extra hours in your day that can be dedicated to growing your business.

Tax Deductions for Business Operations at Home

If you’re running a business from home, you may be able to claim deductions for occupancy expenses. These are the expenses that basically allow you to be in your home in the first place, such as rent, mortgage, rates, and electrical expenses, and would be necessary whether or not you were running a business. You can also claim for: 

  • Running expenses such as electricity use, phone use, and phone bills 

  • Any possible decline in value of equipment that you’re using for business purposes 

  • Furniture and furnishing repairs, and cleaning

  • Costs that you incur purchasing supplies and stationery to successfully carry out your business operations 

  • For travel expenses if you need to travel for your business, such as delivering items from your home to customers, you may claim for expenses accrued when using your vehicle

  • The wear and tear your vehicle may experience and maintenance costs 

How do you know if you qualify for home-based business tax deductions? 

To define the terms, working at home means the majority of your work operations are carried out from within your home. Examples of such would be, if you’re a baker that makes custom-made cakes in your home, or if you are a dressmaker and you do all measurements and designs in your home. 

Working from home, on the other hand, would be if your business does not have a designated premises, but the nature of your business requires you to carry out operations off-site. This would be a plumber or an electrician whereby your base is your home, you store all your tools and equipment at home, but operations take place on site at clients’ location. However, your administrative duties will take place at your home.

Calculating Expenses

Occupancy Expenses

There are a few methods available to determine the amount you can claim when running a business from home. The first method is through a claim for occupancy expenses which is calculated using the interest deductibility test. For this test to apply to you, the area of your home from which you run your business must have the distinct appearance of a business. The interest deductibility test also applies if the business space within your home is not easily converted into a domestic space. If the area of your home is specifically dedicated to your business and you often consult with clients in that space, the test may apply.

Examples of these businesses could be hairdressers whereby you have specific basins and stations set up, a photographer that has a designated studio within their home, or a seamstress or tailor who has an area where they conduct measurements, store materials, and have mannequins set up to sew their designs.

For occupancy expenses, you can claim back the percentage of the area that your business covers within your home in rent, mortgage interest, council rates, and insurance. For example, if the area which your business occupies within your home is 10% of the total area, you can claim back 10% of mortgage interest, council rates, and insurance. However, if you are unable to determine the percentage of the area, the ATO will accept an alternative method of working out how much of your home you use for business purposes, provided the method you use is reasonable and based on accurate information. 

This information can be deduced through extensive record-keeping which entails recording all transactions relating to your tax and superannuation affairs, whether you are establishing your business, currently running your business, or planning to sell your business. These records would be any documents relating to your business’ income and expenses, and any documentation containing the details or calculations related to your businesses tax affairs. 

Running Expenses

You can also claim for the increased costs you will likely incur as a result of using your home’s facilities for your business activities. This includes items like electricity, telephone bills, Wi-Fi and internet costs. 

Running expenses may be claimed if your business operates from a separate room or desk within your home. These running expenses may be claimed even if your workspace does not have the characteristics of a place of business as mentioned above. It is important to note, however, that you can’t claim a deduction for the private use of your home’s facilities. You may only claim a deduction for running expenses that relate specifically to business operations.

Running a Business from Home

What are the legalities when it comes to obtaining permission to operate a business from your living space. If you are starting a new entity, you will need to follow the government stipulated requirements which first includes devising a business structure. Next, you will need to register your business with your business name, an Australian Business Number (ABN), and register for goods and services tax if your turnover is $75,000 or more. Lastly, you need to check what additional permits you might need to begin operating.

Once your business is registered, you may begin operating from home without local council approval, also known as exempt development, so long as your business operations do not impact your neighbours in any way. 

You can qualify for an exempt development to run your business from home if you meet the following criteria: 

  • you do not employ more than two people 

  • you do not disturb the peace of your surrounding neighbours 

  • you do not expose unsightly views 

  • your operations do not involve skin penetration procedures such as tattooing

If you meet the criteria to successfully operate your business from your home, all you need to do is make sure you strike the perfect work-life balance and rest when the opportunity allows.

FAQs

What can you claim if you run your business from home?

You may claim a percentage of occupancy expenses which could include your mortgage interest, rent, council rates, and insurance. You may also claim a related percentage of running expenses, which include electricity, telephone bills, and Wi-Fi and internet costs.

Can you run a business from a residential property in Australia?

Yes, you can, provided it does not employ more than two people, it does not interfere with your neighbours, it does not include skin penetrative operations, and you have gotten the correct permits and approvals from council if applicable.

What can I claim on tax working from home in Australia?

You may claim tax on items and equipment that lose value as a result of use when working from home, you may claim on vehicle related expenses if you are using your vehicle to deliver items, and you may claim on expenses that you incur that are specifically required for you to effectively carry out operations from home.