Bridget Riley, Tax Associate at BDO on Home Business Cost Cutting
Taxpayers running their businesses from home can convert some otherwise non-deductible home running costs into tax deductible costs. The key message is not to overdo it - ideally seek a tax professional's advice at the outset so you're on the right track and will avoid penalties and pitfalls.
A tax payer using his or her home as an "office" for conducting a business may be able to claim a tax deduction for a proportion of the following outgoings of the home:
• Heating and lighting
• Repairs and maintenance
• Home/building and contents insurance
• Mortgage interest (not principle)
• Depreciation on air conditioning, security alarm systems, furniture, carpets, curtains, etc.
• Fees paid to valuers for determining value of assets to be insured
While there's no hard and fast rule for working out how to apportion costs to the business, the general approach is to determine the percentage area used for business purposes and assess the time various areas in the house are used for business versus personal use.
So, if you use the dining room for business 50 per cent of the time, the study 80 per cent, the kitchen 30 per cent- and those areas make up half the total area of the house - you could calculate an average of 27 per cent of the total home running costs that are tax deductible against the income earned from the business.
Telephone/internet rental may be claimed on a proportion of business usage to total usage, although business toll calls are fully tax deductible.
To be able to claim these costs, it's not necessary to physically change the home to accommodate the business or set aside any specific area. However, it's important to be able to demonstrate a legitimate relationship between the costs being claimed and the business venture.
If specific alterations have been made to accommodate a business and an area is used solely for business purposes, it may be possible to claim tax depreciation on the total furnishing and fit-out. However, you can't deduct any costs related to alteration or improvement to the building itself.
When claiming depreciation on furniture and fittings used for business purposes is when selling these assets, there may be a tax cost if the asset is sold at a higher value than the value to which it has been depreciated.
It is crucial to keep records of business income, expenses claimed, bills and invoices and notes of the basis for costs apportionment to satisfy any tax inspector, should your tax position be investigated.
If GST-registered you may also be able to claim the GST on a proportion of your invoices for services such as power, telephone, internet, water, rates etc. based on the overall average of business usage in your GST returns.
A word of caution
Finally, a word of caution on where the home and business are owned by separate entities. For example where a trust owns the home and a company owns the business, you should ensure the correct party is claiming the business deductions.
Next week: Building your brand from scratch will be one of your first challenges as a start up. How did brands like Icebreaker and Moa build their brand from day one?