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Sydney small business accounting questions to ask when working from home

I was going to start this article with the expression "the average small business owner" and then it dawned on me that no two small businesses are alike, each one serving a different purpose according to it's owners desires. Of course there will always be some common elements to small business operators across Australia. One such factor is the almost universal need for the small business owner to be available to the businesses needs no matter the time or day. This leads to a question that we hear almost daily in our practice, "What home office expenses can I claim?"

The answer to that question is that if you are doing some form of business related work from your Sydney home, you will be able to claim something in the way of a personal tax deduction. Exactly what and how much you can claim varies quite considerably depending on your personal circumstances. These expenses can be defined into two separate categories.

Is your business operated from a separate commercial office/warehouse or factory?

If you've answered yes to the above question yet you are also doing work from home then the following factors will determine your home office expense claim.

The simplest way forward here is to use the ATO pre-defined rate of $0.34 cents per hour spent in your home office. This rate covers the cost of extra electricity and gas and the depreciation, or wear and tear on your home furnishings.

The alternative method for lighting and heating costs is to base your claim using a reasonable percentage of your home expenses. This can be based on hours spent working at home, or on the floor space of your home study, as a proportion of the total home. Either way, be sure to keep documented records. Neither of the preceding two points account for assets such as furnishings or electronic devices such as copiers, faxes and computers. These can all be depreciated and treated as a separate claim. Just be sure to allow for a private percentage where home computers are also used by the kids to do their homework.

The final expense likely to apply here is for telephone expenses. Again, a claim can be made based on specific phone calls listed on your home phone account or a reasonable percentage of usage. The same applies to mobile phone accounts.

Is your business based at and run from your home?

If you've answered yes to the above question, then your claim for home office expenses will be different in some respects to the previous scenario. In addition to all of the expenses and claim methods outlined above you may be able to claim "occupancy expenses". Note that you can only claim occupancy expenses if part of your home has the nature of a place of business, such as a massage therapist that has a room set up with massage tables and so on. Clearly this room is not going to be used for any other purpose than the business income producing activities and is well defined as a place of business. Occupancy expenses can include;

  • Cost of ownership such as mortgage interest or rent paid to a landlord
  • Council rates on the property
  • Water rates for the home
  • Insurance premiums for the building
  • Cleaning and pest control expenses
  • Building maintenance such as painting.

The calculation methods for claiming occupancy expenses are similar to the methods outlined above. In general a business floor space to total floor space percentage is the most accepted way of determining your home office occupancy expenses claim. Caution must be exercised in seeking to claim occupancy expenses. Generally, employees are not going to satisfy the tax office criteria as having a home based business, unless you are an employee of your own company that is in fact home-based.

A final word of warning that is often overlooked is the potential Capital Gains Tax implications of treating and claiming expenses for your home based business. One of the few tax free assets any of us can own is the family home. However, should you decide to claim occupancy expenses for your home based business then the tax office will treat that part of your home as a business, so that when you do sell your home, the percentage you've applied to receive a tax deduction for occupancy expenses will also be used to assess part of your homes sale as bring subject to capital gains tax. Missing out on even a small portion of the main residence exemption can result in a hefty surprise tax bill when selling the family home. Does this mean you shouldn't claim occupancy expenses? Unfortunately there isn't a black or white answer here. It depends on your personal circumstances and a careful consideration of how the tax laws apply to your situation.

Of course, the article above is a very succinct summary of the ins and outs of claims and expenses from a Sydney small business accounting perspective. For a more definitive outcome, it's always best to speak to a small business accountant.

 
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