A significant proportion of our clients operate their businesses from their homes, so we are commonly asked for advice regarding what costs can legally be claimed. This blog gives an overview of what home office expenses you can claim and what receipts you will need to keep.
Legally deductible home office expenses basically fall into 4 categories:
1. RUNNING EXPENSES
You are allowed to claim for the cost of operating from a home office, including electricity, gas and the depreciation of office furniture. This deduction is only allowed when it is deemed that your home office is incurring costs additional to regular household expenses. So you are not eligible if your office space is also being used for the family to watch TV.
Basically what the tax department expects is that you are going to claim the difference between what was actually paid and what would have been paid if you were not working from home.
Of course, this is easier said than calculated, so the Commission has provided a couple of options:
- Fixed rate method: You can use a standard rate of 34 cents per hour to calculate your running costs, and will not be required to retain receipts.
- Actual Expenses Incurred: Using this method you are required to retain receipts for electricity and gas and to calculate a reasonable percentage that can be attributed to home office use. You will also have to calculate depreciation on any office furniture. To make this method a little less onerous, the tax office allows you to use a representative 4-week period, rather than calculating throughout the year.
2. TELEPHONE & INTERNET EXPENSES
If you are using your home telephone or internet service for business purposes then you can deduct these costs. You will need to identify business calls from an itemized telephone account. However, a representative 4-week period will be accepted as establishing a pattern of use for the entire year.
3. DEPRECIATION ON EQUIPMENT
Depreciation on home office furniture is considered part of your running expenses if you are using the fixed rate method. But you can also claim for depreciation of home office equipment, including computers, printers, photocopiers, scanners, modems, carpets etc.
You will need to keep a diary for a 4-week period to establish the percentage of use for business and personal uses.
4. OCCUPANCY EXPENSES
If your home is also your place of business then you are allowed to claim occupancy expenses, which include rent, mortgage interest, water rates, repairs and house insurance premiums.
The tax department uses the following factors to decide whether an area of your home can be classified as a place of business:
* the area is clearly identified 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 on a business
* the area is used regularly for client or customer visits.
You are going to need to retain receipts for rent, mortgage interest, council and water rates, insurance premiums, body corporate levies, repairs and any other cost related to the office area of your home. You will also need to know the floor area of your house and the room used for work purposes.
WARNING: Claiming occupancy expenses may affect your main residence exemption for capital gains tax purposes. If you own your home we strongly recommend that you consult with your accountant before claiming these expenses.
The tax department has an online calculator to assist you in calculating your home office expenses. This is handy, but be aware that it does not allow for telephone costs or depreciation on equipment.