Home Ownership Costs are costs that you incur in purchasing and generally maintaining your home. You could say they are expenses you would incur regardless of whether or not you are conducting a business from your home. Home Ownership costs include
- Home Loan / Mortgage Interest
- Rent
- Council Rates
- Home & Contents Insurance
This section of our tax tips covers three main points
1. Am entitled to claim my Home Ownership Costs
2. How do I work out the claimable percentage of my ownership costs
3. What if my home is not a place of business
4. How does having a portion of my house as a place of business effect capital gains
5. How is your capital gain calculated
1. Am I entitled to claim my Home Ownership Costs?
You can claim a portion of your home occupancy costs where a portion of your home qualifies as a place of business. The following criteria would indicate that you have a home work area that qualifies as a place of business.
The following are general guidelines and you don’t have to meet all of the points noted in order to be a place of business. If a part of your home meets most of criteria it will likely be a place of business.
- The area is clearly identifiable as a place of business
In this case you may have an area of your house set up with toys, play equipment, cots and other equipment or furniture that would make it clearly identifiable as an area set aside for the caring of children.
Another factor which makes it identifiable is if you have a sign or other marker pointing to your home being used 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
To meet this definition you may have installed certain fittings like a nappy change table or other permanent item that would make it difficult to change back into a regular living space.
- The area is used exclusively or almost exclusively for carrying on a business, and
You may have a garage, downstairs area, sun room or other area which ideally can be closed off from the rest of your house. Ideally it would have a separate entrance to the regular door your family uses.
As a rule of thumb if the day care children use an area which is also used for everyday living by you and/or your family it is unlikely to meet the definition of being a place of business. This is likely to rule out bathrooms, kitchens and shared bedrooms unless they are only used for children in care.
- The area is used regularly for visits of clients or customers.
As the sentence indicates the day care children would use the area regularly. If you use the area occasionally or very little then this generally will not exclude the area from being a place of business.
2. How do I work out the claimable percentage of my ownership costs
If you believe a section of your home meets the definition of a place of business you may be able to claim a portion of your Rent or Home Loan / Mortgage Interest. The portion of your expenses you may be entitled to claim is outlined below.
As a general rule, the floor area of the home is measured including all external walls and includes verandah’s and outbuildings, whereas individual room measurements are the actual floor area between the walls.
Examples of Apportionment
Area and time apportionment (occupied full year)
Jane’s unit qualified as a place of business for the full year. The floor area of the unit and the garage was 14 squares. The floor area of the day care area was 2 squares. Jane would be entitled to claim 2/14 (that is, 14.29%) of her occupancy expenses as a deduction.
Area and time apportionment (occupied part year)
3. What if my home is not a place of business
If a portion of your home cannot be defined as a place of business, you cannot claim your home occupancy costs. You are only entitled to claim your home running costs. The other point to remember if your house is NOT a place of business is that it will not be subject to capital gains and you will not need to pay any tax when you sell your property.
4. How does having a portion of my house as a place of business effect capital gains
If you have an area of your house which meets the definition of a place of business your home will be subject to capital gains. In this circumstance your house will still be subject to capital gains even if you have NOT claimed your Home Occupancy Costs.
Your capital gain is calculated in accordance when you purchased your house, the length of time you have used your home for business purposes and the percentage you are / were entitled to claim as a place of business.
5. How is your capital gain calculated
If a portion of your house is subject to capital gains the below example provided by the tax office demonstrates how your capital gain is calculated.
Ruth bought her home under a contract that was settled on 1 January 1999. She sold it under a contract that was entered into on 1 November 2009 and settled on 31 December 2009. It was her main residence for the entire 11 years.
From the time she bought it until 30 June 2004 (five years and six months), Ruth used part of the home to operate her day care business. The rooms were modified for that purpose and were no longer suitable for private and domestic use. They represented 25% of the total floor area of the home.
When she sold the home, Ruth made a capital gain of $80,000. The following proportion of the gain is taxable:
Capital gain X percentage of floor area not used as main residence X percentage of period of ownership that that part of the home was not used as main residence = taxable proportion
$80,000 X 25% X 50% = $10,000
It should be noted that as Ruth has owned her home for at least 12 months, she may be entitled to a 50% discount on her taxable proportion making it only $5,000
Small Business Concessions
Further to the example above, Ruth may also be entitled to reduce her taxable portion by using some of the small business concessions. These concessions could reduce the capital gain by an additional 50% or $2,500 and in certain circumstance she could defer / rollover this amount being assessable or ignore the gain altogether.
