Home sweet home office – A simple guide to tax deductions

It’s that time of the year again, when the tax man comes knocking and you empty the old shoebox on your accountants desk. But what can you actually claim? Keith Hardy from Deloitte Private Tax provides some guidance on what can be deducted for your home office.

Main home office tax deduction considerations are:

  • Whether you are running a business from home or are a salaried employee who has a home office.
  • If you are running a home business you may potentially be able to deduct both occupancy and running costs, whilst a home office (of a salaried employee) allows you to only deduct running costs.
  • The biggest danger in deducting occupancy costs, particularly mortgage interest, is that capital gains tax may be payable on a portion of the gain following the sale of the property, despite the tax payer being entitled to the main residence exemption.

As nice as it would be to claim the back shed as your “break room” and the lounge as a “meeting room”, the factors that indicate that an area is a place of business are:

  • The space is clearly identifiable as a place of business;
  • it is not readily suitable or adaptable for use for private and domestic purposes;
  • you use the space (almost) exclusively for carrying on a business;
  • It is used regularly for visits of clients/customers; and
  • remember, this is a question of fact not election.

The main tax deductions available for those people who have a home office is often divided in to two categories, which broadly include:

  • occupancy expenses – typically relate to the ownership of the home and are not affected by the taxpayer’s income earning activities; and
  • running expenses – expenses which relate to the use of facilities in the home.

So what occupancy expenses are actually deductible?

Although not exhaustive, typical occupancy expenses usually claimed include:

–       Rent

–       Mortgage interest

–       Municipal and water rates

–       Land taxes

–       House insurance premiums

  • These are only available if part of the taxpayer’s home qualifies as a place of business and the claimable amount is a question of fact dependent on the taxpayer’s individual circumstances.
  • The most appropriate method to determine the deductible amount is to apportion the total expense incurred on a floor area basis.
  • If an area of the home is a place of business for only part of the year it is usually more appropriate for expenses to be apportioned based on floor area as well as a time basis.
  • Interest deductions are usually based on a % of floor area that is used for income producing purposes and if applicable the time in the period of ownership of the main residence that the income producing activities were run for.

What running expenses are deductible?

  • Available when the taxpayer’s home does not qualify as a place of business but home is used in connection with income producing activities.
  • A deduction is only available to the extent that the expenditure actually incurred as part of their income earning activities is additional to their private expenditure.

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