Claiming tax deduction for home office? Part 1

Whether you are self-employed or are an employee, you may be able to claim certain work related expense as deduction where the part of your home is used for income producing purpose and has the character of a place of business.

To claim such work related expenses, part of your home must be used regularly and exclusively as one of the following:

• The principal place of business for your trade or business;
• The place where you meet and deal with your patients, clients, or customers in the normal course of your trade or business; or
• in connection with your business or income producing activities, but does not constitute a place of business

Today we look at using your home as a Principal Place of Business

The question of whether your home has the character of a place of business is essentially based on the facts of your situation.  This matter has been addressed in a number of court cases and in Taxation Ruling 93/30, the following were stated as factors to be considered:

• the area is clearly identifiable as a place of business;
• the area is not readily suitable or adaptable for use for private or domestic purposes in association with the home generally;
• the area is used exclusively or almost exclusively for carrying for carrying on a business; or
• the area is used regularly for visits of clients or customers.

The existence of any of these factors or a combination of them will not necessarily be conclusive in determining whether the home constitutes a place of business in the ordinary and common sense meaning of the term. The determination will depend on whether, on a balanced consideration of:

• the essential character of the area;
• the nature of the taxpayer’s business; and
• any other relevant factors.

If you run your business from home and an area of home is set aside exclusively for these business activities, then your home is qualified as the principal place of business for examples

• a small business operator whose main office is in their home
• a tradesperson or craft person who has their workshop at home, and
• a doctor or dentist who has their surgery or consulting room at home

You can claim a deduction for the following:

• The cost of using a room’s utilities, such as gas and electricity
  • These must also be apportioned. If the business portion is based on anything other than the floor area (for example, on actual electricity usage) you will need to clearly document your claim.
  • Business phone costs
    • If a telephone is used exclusively for business you can claim for the rental and calls, but not the installation costs. If the telephone is used for both business and private calls you can claim a deduction for business calls.
  • Decline in value of office plant and equipment (for example, desks, chairs, computers)
    • If the equipment (such as a computer) is also used for non-business purposes, your claim must be apportioned.
  • Decline in value of curtains, carpets and light fittings.
  • Cost of owning or renting the house (such as rent, mortgage interest, insurance, rates).
    • You can claim the portion of these costs that relates to the room or workshop you use as a place of business. A common method of working out how much to claim is the floor area (as a proportion of the floor area in your whole home).

Capital gains tax

Note that if your home is a place of business there may be capital gains tax implications when you come to sell your home.

Occupancy expenses are relating to ownership or use of a home. These include rent, mortgage interest, municipal and water rates and house insurance premiums.

The actual amount which can be claimed is dependent on your circumstances. In most cases, a floor area basis is the most appropriate method for the apportionment of the total expense incurred.

However, where an area of the home is a place of business for part of the year only, it may be necessary for the expenses to be apportioned on a floor area and a time basis.

It is necessary for you to keep records of occupancy expenses included in work related expense in order to claim the deductions such as original receipts, accounts and/or other documentary evidence.

This article has been prepared for the purposes of general information and guidance only. It should not be used for specific advice or used for formulating decisions under any circumstances. If you would like specific advice about your own personal circumstances please contact our office.