As a general rule, expenses associated with your home are private and you can’t claim a tax deduction for them. However, if you operate a business at or from your home, you may be able to claim a deduction for some of the expenses relating to the area you use for business purposes. These expenses are divided into Occupancy expenses and Running expenses.
Occupancy expenses are expenses related to your ownership, rental or use of the home and are not incurred because of your income-earning activities. In other words, you would have these expenses regardless of whether you were carrying on a homebased business.
Occupancy expenses include:
- mortgage interest
- council rates, and
- housing insurance premiums
Running expenses are expenses related to using facilities within your home for business. Carrying on a business at or from your home means that these expenses may be higher than if you were not doing so.
Running expenses include:
- cost of using a room (such as electricity and gas costs for heating, cooling and lighting)
- decline in value of plant and equipment (for example, desks, chairs, bookcases, computers, lathes and grinders)
- decline in value of curtains, carpets, light fittings, etc.
- cleaning costs
- cost of repairs to furniture and furnishings.
Does the area set aside have the character of ‘a place of business’?
The area must have the character of ‘a place of business’. While this will depend on your particular circumstances, an area of your home is likely to have the character of a place of business if it is:
- clearly identifiable as a place of business (for example, you have a sign identifying your business at the front of your house)
- not suitable for private or domestic purposes
- used almost exclusively for carrying on your business, or
- used regularly by your clients.
How much can you claim?
Rent, mortgage interest, insurance, council rates
If eligible to claim occupancy expenses, you can claim the percentage of rent, mortgage interest, council rates and insurance that relates to the area you use as a place of business.
Utilities (gas, electricity)
If the business percentage is based on anything other than the floor area (for example, on actual electricity use) you will need to clearly document your claim to show how you arrived at the amount.
Where you don’t have an area of your home set aside exclusively for business, you can’t claim on a floor area basis as this area is also used for non-business purposes. In this case, you’ll need to show how you arrived at the amount you’re claiming for gas and electricity.
You’re allowed a deduction only where you incur additional running costs because of your business activities. For example, if you work in a room where other family members are watching television, you would probably not have additional heating costs as a result of that work activity.
Furthermore, the business use of the home work area needs to be substantial and not merely incidental. For example, you couldn’t claim 34 cents an hour simply because your fax machine is on 24 hours a day, 7 days a week, to receive business faxes.
If you use a phone exclusively for business, you can claim a deduction for the phone rental and calls, but not the cost of having the phone installed. This is because the installation cost is considered a capital expenditure. If you use a phone for both business and private calls, you can claim a deduction for business calls and part of the rental costs.
Business plant and equipment
If you use plant and equipment solely for business purposes, you can claim the full amount of depreciation. But if you also use equipment (such as a computer, printer, photocopier, grinder, circular saw) for non-business purposes, you have to reduce the depreciation deduction by an amount that reflects this non-business use.