Are Capital Gains Tax and Income Tax Deductions Hiding in Your Home Office?

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Home office

By Kim Reynolds and Kristin Taylor

Do you undertake incidental work from home out of mere convenience, or, do you use your home as a principal place of business?  If you answered “yes” to the latter, then you may be exposing yourself to capital gains tax on the sale of your home while also missing out on potential income tax deductions along the way.  We take a closer look at both of these scenarios below.

Your home is not your principal place of work

If you work from home but your home is not your principal place of work, you cannot claim occupancy costs such as rates or mortgage interest. However, you may be able to claim running costs for your home office using one of the following methods:

  1. ATO Fixed Rate of 52 Cents Per Hour

Instead of recording all your actual running expenses (e.g. heating, cooling, lighting, cleaning etc.), you may be able to claim a deduction of 521 cents for each hour you work from home.  To do so, you will need to keep a record or diary of actual hours spent working from home.  If you choose this method, then bear in mind that the ATO rate includes notional depreciation for office assets.

1From 1 July 2018, the rate was revised upwards from 45 cents per hour to 52 cents per hour.

  1. Actual Running Costs

For those who have a dedicated work area (such as a study), you will need to keep the following records to utilise the actual running cost method:

  • Total running expenses for the year for each cost, such as electricity and cleaning.
  • Calculation of the proportion of total floor area that relates to your dedicated work area.
  • Calculation of the percentage of the year that you used that part of your home exclusively for work.

If you did not have a dedicated work area, additional expenses such as lighting, heating and cooling should be calculated by determining the actual cost of running each unit you used per hour and multiplying that by the hours you spent working at home.

In addition to running costs, you will need to separately work out all other home office expenses, such as phone, internet and depreciation of office assets, as they relate to your work.

As your home is not your principal place of work and you cannot claim occupancy costs, your home will generally not be subject to capital gains tax when it is sold.

Your home is your principal place of work

In addition to claiming a tax deduction for running costs (refer above), where your home is your principal place of work you may also claim a portion of your occupancy expenses (i.e. mortgage interest, property insurance, land taxes and rates etc.) based on the floor area of your home office. However, in order to claim a tax deduction for occupancy expenses you must satisfy certain criteria (‘income deductibility test’) including:

  • Your home is your principal place of work (that is, no other location is provided to you by your employer);
  • You have part of your home set aside exclusively as a place of business that is unlikely to be suitable for domestic use; and
  • It is clearly identifiable as a place of business (e.g. signage identifying your business at the front of your house).

For example, a tradesperson who has their workshop at home or a doctor who has their surgery or consulting room at home may satisfy the above criteria.

Your main residence (i.e. your home) is generally exempt from capital gains tax. However, if you satisfy the above criteria, a portion of your home will be subject to capital gains tax when you sell it because it has been used for income-producing purposes.

Importantly, even if you choose not to claim any home occupancy expenses in your income tax return, you will not avoid capital gains tax when you sell your home. By passing the interest deductibility test, capital gains tax can apply regardless of whether or not you have claimed any expenses as a tax deduction when you owned the home.

If you have any questions or would like to discuss capital gains tax and working from home further, please do not hesitate to contact our office.

Want to know more?

If you have any questions or would like to discuss capital gains tax and working from home further, please contact Kim Reynolds our Taxation Advisory Director for assistance.

An Important Message

While every effort has been made to provide valuable, useful information in this publication, this firm and any related suppliers or associated companies accept no responsibility or any form of liability from reliance upon or use of its contents.  Any suggestions should be considered carefully within your own particular circumstances, as they are intended as general information only.

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