Home-based business – Part 3
Example 1: Rocco the plumber
Rocco is a sole trader plumber who doesn’t have a dedicated business premises. He travels to his clients’ houses each day from home. He does his bookkeeping in his dining room on a computer that he only uses for his business. Rocco keeps a diary for four weeks and finds that he spends, on average, two hours a day, five days a week (with four weeks of holidays a year) on his bookkeeping.
- running expenses using the fixed rate of 52 cents per hour for 10 hours a week for 48 weeks ($249.60)
- the cost of his computer, as it cost less than $30,000 (the instant asset threshold that applied at the time he bought and installed it) and depreciation of computer equipment is not covered by the fixed rate.
Rocco cannot claim:
- occupancy expenses, as he does not have a dedicated area for his business.the cost of his computer, as it cost less than $30,000 (the instant asset threshold that applied at the time he bought and installed it) and depreciation of computer equipment is not covered by the fixed rate.
Example 2: Fern the photographer
Fern runs her business – Fern’s Photos Pty Ltd – as a company from the home that she owns.
Fern’s house has a dedicated studio where she keeps her photography equipment.
Fern’s Photos Pty Ltd has a formal rental agreement with Fern to hire the studio for $500 per month. This covers use of the space and facilities such as electricity. It is consistent with what it would cost the company to hire a similar studio elsewhere.
Fern’s Photos Pty Ltd claims rent paid to Fern.
Fern must report the rental income that she receives from her company in her personal income tax return. She can claim expenses that she incurs in making that income.
There may be CGT implications if Fern sells her house.
Home office expenses
If you’re an employee who works from home, you may be able to claim a deduction for expenses you incur relating to that work. These can be additional running expenses such as electricity, the decline in value of equipment or furniture and phone and internet expenses.
In most cases, if you are working from home as an employee, there will be no capital gains tax (CGT) implications for your home.the costs of using a room (such as heating, cooling and lighting).
Expenses you can’t claim
There are some expenses you can’t claim a deduction for as an employee. Employees who work at home can’t claim costs:
- for coffee, tea, milk and other general household items your employer may otherwise have provided you with at work
- related to children and their education including setting them up for online learning, teaching them at home or buying equipment such as iPads and desks
- that you’re reimbursed for, paid directly by your employer or the decline in value of items provided by your employer – for example, a laptop or a phone.
Employees generally can’t claim occupancy expenses such as rent, mortgage interest, water and rates.
There are three ways of calculating home office expenses depending on your circumstances. The methods are the:
- Shortcut method (80 cents) – only available 1 March to 30 June 2020
- Fixed rate method (52 cents)
- Actual cost method
You must meet the record keeping requirements and working criteria to use each method.