FocusOn - Home office

Claims for home office expenses are available for individuals who carry on a business from home or use their home while undertaking some of their employment duties. Taxpayers need to distinguish between running expenses and occupancy expenses. Occupancy expenses can only be claimed in limited circumstances.

Home Office

Generally, where an employee uses an area of a home for employment duties the additional ‘running expenses’ of that area are deductible. This refers to the extra expenses incurred as a result of operating a home office.

Running expenses are primarily the additional gas and electricity expenses. You may also be able to claim a portion of your contents insurance, cleaning costs, leasing charges on equipment, decline in value on equipment and cost of repairs of furniture and fittings in the home office.

The most convenient method of claiming home office running expenses is by using the rate of 26 cents per hour of use. This is the method preferred by the Australian Taxation Office. The rate accounts for the costs for heating, cooling and lighting and the decline in value of furniture (desks, tables, chairs, and cabinets and shelves). Due to larger variations in costs of computers, telephones, photocopiers, etc, you are still able to claim the decline in value on these items in addition to the standard rate claim.

You can also choose to base your claim on a reasonable percentage of the household annual gas and electricity bills.

There are no capital gains tax implications upon the sale of your home where you are merely working from home as part of your employment/business duties. It is important to distinguish between a ‘home office’ and a ‘place of business’ (explained below).

Time Diary
In order to substantiate the use of a home office a time diary must be kept for at least a representative four week period to establish a pattern of use for the entire year. A new time diary must be kept for each financial year in which a claim is made for home office expenses.

Place of Business

Where part of the home is used solely for income producing activities and has the character of a ‘place of business’, a proportional claim may exist for direct ‘occupancy’ expenses in addition to any running expenses.

A part of the home is generally a ‘place of business’ if any of the following applies:

	the area is clearly identifiable as a place of business (for example street-side signage identifies the office)
	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 business activities the area is used regularly for visits by clients or customers

Examples include a doctor’s surgery where there are consulting rooms at home, or a tradesperson who has a workshop at home. In most cases calculation of ‘occupancy expenses’ is determined on a floor area basis as follows:

Place of business claim:

If the place of business is used for part of the year only, the above calculation will need to be apportioned on a time basis.

Occupancy expenses can include:

	interest on the mortgage, or rent
	building insurance
	council and water rates
	heating/cooling and lighting expenses
	cleaning costs and pest control
	decorating, including painting or wallpapering, etc

The ‘place of business’ claim is generally only available for those that operate a business from home. Employees may be entitled to this type of claim only where:

	it is inherent in the nature of your activities as an employee that you need a place of business
	your circumstances are such that there is no alternative place of business and it is necessary to work from home, and
	the area of the home is used exclusively or almost exclusively for income producing purposes.

Capital Gains Tax

There are capital gains implications if your residence was purchased after 19 September 1985 and part of the residence has been used as a ‘place of business’. The main residence exemption is not available for the part of the residence relating to the place of business. Accordingly, capital gains tax will be payable on a portion of the gain on the sale of your home. The capital gains tax is technically payable on the portion of your home that relates to the place of business irrespective of the tax deduction claimed.

Published : 6 July 2007