Many small businesses operate from the owner’s home. This could mean the factory is a shed in the backyard and the office a corner of the kitchen or dining room table.
For others the business can have a separate section of the home or permanent structure on the property used exclusively by the business. The facts of each case will determine what costs can be claimed as a tax deduction.
Business owners are often keen to claim a percentage of the interest on a loan where a mortgage has been taken out to purchase the property. The ability to claim property related expenses will depend on two tests being passed.
The first requires part of the home or the property to be set aside exclusively as a place of business. This would mean the part of the home used for business purposes could not have a dual private usage component. Setting up half of a large rumpus room as an office, with the rest being used for private purposes, would not satisfy this test.
In addition to the exclusive use test the section used for business purposes must be clearly identifiable. This can often mean that there is an entrance for the part used as a home and a separate entrance for the section relating to the business. Building a shed that is used exclusively by a business for manufacturing or storage purposes would result in part of a property being classed as business premises.
If these tests are passed a portion of the property related expenses can be claimed including interest on the loan to purchase the property and rates. The method used to apportion the expenses must be able to stand up to the scrutiny of the ATO. An accepted method is calculating the area used for business purposes as percentage of the total area of the home.
In addition to the property related costs a tax deduction can also be claimed for the occupancy costs such as electricity, gas, telephone and internet usage. For these costs the owners must again be able to prove how they apportioned them between business and private usage. Where the business property tests cannot be passed a business can still claim a portion of occupancy costs.
The ability to claim property related expenses does however come at a cost. By establishing a home or property is used for business results in a loss of the main residence capital gains tax exemption for that part of the home or property.
This will mean the owners of the business need to have the home valued at the time it starts to be used for business purposes. When the property is sold a portion of the difference between the net sale proceeds and the value when the business was started will be taxable as a capital gain.
Thankfully in this situation if a business owner passes the small business capital gains tax exemption tests income tax may still not be payable.
Tax for small business, a survival guide, by Max Newnham is available in bookstores