July 2019

SMALL BUSINESS HOME-BASED BUSINESS EXPENSES

This is a very common question as to what can be claimed. This information is based on ATO summaries and we hope you find it useful.

• The types of expenses you can claim depend on how you operate your business out of your home.
• You can only claim deductions for the portion of your expenses that relate to running your business.
• You must keep records for at least five years to show that your business incurred the expenses and how you calculated your claim.
• If you sell your home, there may be capital gains tax (CGT) implications.

Business structure

Your business structure affects your entitlements and obligations when claiming deductions for your home-based business expenses.

Sole Traders and Partnerships

If you operate your business as a sole trader or partnership, you can claim a deduction for the costs of running your business from home.

There are two types of expenses for your home-based business – running expenses and occupancy expenses. Whether you can claim running expenses only, or both running and occupancy expenses, depends on whether you have an area of your home set aside as a ‘place of business’.

Running Expenses

Running expenses are the increased costs from using your home’s facilities for your business, for example:

• The costs of using a room (such as heating, cooling and lighting);
• Cleaning costs;
• Landline phone and internet costs;
• Decline in value (depreciation) of your business furniture and equipment;
• Costs of repairs to your business equipment.

You can claim running expenses if you run your business from home, such as in a separate study or a desk in a lounge room, even if it doesn’t have the character of a ‘place of business’

Calculating your claim

To calculate the running expenses of your home-based business, you can use one of the methods described below or any other method as long as:

• If it reasonable in your circumstances;
• You exclude your normal (private) living costs;
• You have records to show how you calculated the business expense.

Heating, cooling and lighting

• If you have an area set aside for your business, you can split your heating, cooling and electricity bills based on the proportion of the year that you used it for business.
• Alternatively, you can use a fixed rate of 52 cents an hour for each house that you operate your business from home in, based on either your actual use or pattern of use. This covers heating, cooling, lighting, cleaning and the decline in values of furniture and furnishings (you need to work out other expenses separately).

Home phone and internet

• For home (landline) phones, you can claim your business calls and a portion of the line rental costs.
• For internet expenses, you can claim the proportion of time or data you used your internet for business purposes.
• You can calculate the business portion of your home phone and internet using an itemised account or pattern of use.

Decline in value (depreciation) of business assets

• You don’t separately claim the depreciation of your home-based business furniture and furnishings if you claim running expenses using the fixed rate of 52 cents per hour, as this is included in this rate.
• You can use the instant asset write-off to deduct the full cost of business assets that cost less than the threshold that applied when it was first used or installed and ready for use.
• If you use assets for both personal and business use, you can separate your business deprecation expenses from personal, based on your ‘pattern of use’.

You can claim some expenses based on your ‘pattern of use’, which you can work out by keeping a diary for a representative four-week period each financial year. If you can’t show a regular pattern, you need to keep detailed records.

Occupancy expenses

Occupancy expenses are the expenses that you pay to own or rent your home, for example:

• Mortgage interest or rent;
• Council rates;
• Last taxes;
• House and contents insurance.

You can only claim occupancy expenses if the area of your house set aside for your business has the character of a ‘place of business’ (including if most of your business is conducted online).

Indicators that the area of your home that you’ve set aside is a place of business include:

• Clearly identifiable as a place of business (such as a sign at the front of your house);
• Not easily suitable or adaptable for private or domestic use;
• Used exclusively or almost exclusively for your business;
• Used regularly for business visits by your clients.

If you’re eligible to claim occupancy expenses, you can also claim running expenses. You usually calculate occupancy expenses based on the proportion of the floor area of your home that is a place of business and proportion of the year it was used for business.

Trusts and Companies

If you operate your home-based business as a trust or company the business should have a genuine, market-rate rental contract (or similar agreement) with the owner of the property. This will determine which expenses the business pays for and can claim as a deduction. If there isn’t a genuine rental contract, there may be tax implications for you and the business.

If you are an employee of the business and the business pays for or reimburses you for some of the costs of running your business from home, you cannot claim a deduction for the expenses in your individual income tax return. Your business will be subject to fringe benefit tax (FBT) if it pays or reimburses you for the expenses.

Certain exemptions and concessions may reduce your FBT liability. You may need to keep additional records. If you earn personal services income (PSI), you may not be able to deduct some occupancy expenses.

Capital Gains Tax (CGT)

If you were entitled to claim occupancy expenses or you own your home and receive rental income from your business, there may be CGT implications when you sell your home. The main residence exemption may not apply for the proportion of your home and the periods that you used it for your business.

Records you need to keep

You need to keep records to substantiate your claims for all of you home-based business expenses.

This includes written evidence, tax invoices or receipts for:

• Purchase and repairs of furniture and equipment used for your business;
• Utility bills and cleaning expenses;
• Mortgage interest, rent, insurance and council rates (if you claim occupancy expenses);
• Rental contract between homeowner and business (if you claim occupancy expenses);
• How you separate your business and private use (for example a diary over a representative four-week period of records of how you calculated the percentage of your floor plan dedicated to your business).

Examples

Rocco: plumber

Rocco is a sole trader plumber who doesn’t have a dedicated business premises. He travels to his clients house 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.

Rocco claims:

• Running expenses using the fixed rate of 52 cents per hours for 10 hours a week for 48 weeks ($249.60);
• The costs of his computer, as it cost less than $30,000 (the instant asset threshold that applied at the time he brought 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 of his business.

Fern: 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 received from her company in her personal income tax return. She can claim expenses that she incurs in making that income.

There may be a CGT implication if Fern sells her house.

TRAVEL EXPENSES

This information does not deal with motor vehicle expenses and travelling to and from your places of business.

Types of expenses

As the owner of a small business, you can claim a deduction for expenses that you incur when you travel for your business. Common expenses include:

• Airline, bus, train, tram and taxi or ride-sourcing fares;
• Care-hire fees and the costs you incur (such as fuel, tolls and car parking) when using a hire car for business purposes;
• Accommodation and meals if you are away overnight.

You cannot claim a deduction for any travel undertaken before you started running your business.

Claiming travel expenses

Your business can claim a deduction for travel expenses related to your business, whether the travel is taken within a day, overnight, or for many nights. The expenses must form part of your business records.

You cannot claim any private costs of the travel, for example leisure activities, a holiday that you add onto your business travel, or the costs of a family member who travels with you.

To claim expenses for overnight travel, you must have a permanent home elsewhere and your business must require you to stay away from home overnight. You cannot claim travel expenses that arise because you are relocating or living away from home.

If you operate your business as a company and the business pays for private portions of your travel, there may be tax implications for you (as an individual) and your business for providing benefits to you.

Employee Travel Expenses

Whatever your business structure, if you have employees who travel for your business, the business must actually incur the travel expenses (by paying for it directly or reimbursing the employee) to be able to claim it as a deduction.

Your business may be subject to FBT if it pays or reimburses your employees for their travel expenses or private activities. Certain exemptions and concessions may apply to reduce your FBT liability. To access the exemptions and concessions, you may need to obtain records from your employee.

If you pay your employees a travel allowance or living-away-from-home allowance, there are different considerations.

Records you need to keep

You need to keep records that prove all of your business travel expenses for five years. These records can include:

• Tax invoices;
• Boarding passes;
• Tickets;
• Travel diary;
• Details of how you worked out the private portion of expenses.

If you are a sole trader or partner in a partnership, you must keep a travel diary if you are away for six or more consecutive nights. A travel diary is also highly recommended if you run your business as a company or trust, as it will help you to determine the portion of the travel that was for private purposes.

If you’re a sole trader with simple tax affairs, you can use the myDeductions tool in the ATO app to record your business-related expenses.

Travel Diary

In your travel diary record the details of each business activity as you go including:

• The nature of each business activity;
• The date and approximate time the business activity began;
• How long the business activity lasted;
• The name of the place where you engaged in the business activity.

The travel diary can be in any format that records this information.

Example: Rebecca

Rebecca owns a business as a sole trader landscape gardener. She is invited to exhibit at the Chelsea flower show in England. This involves six days of work representing her business at the show. After the show is finished, Rebecca spends some time sightseeing.

Rebecca’s son James joins her on her trip. James is not involved in the business and spends the days exploring London while Rebecca is at the Chelsea flower show. As Rebecca is travelling for more than six nights, she keeps a travel diary.

ATO TO IRON OUT FALSE LAUNDRY CLAIMS

The ATO intends to target false clothing and laundry work-related expense claims this Tax Time. In 2018, around six million people claimed work-related clothing and laundry expenses totalling nearly $1.5 billion.

According to Assistant Commissioner Karen Foat, although many Australians can claim clothing and laundry expenses, it’s unlikely that half of all taxpayers are required to wear uniforms, protective clothing or occupation-specific clothing to earn their income.

• You must have spent the money you are claiming on buying or cleaning eligible clothes. While you don’t need receipts for claims up to $150, the ATO can ask how you calculated your claim. The ATO may even ask your employer if you have a required uniform.
• Last year a quarter of all clothing and laundry claims were exactly at the record-keeping limit. The ATO may still scrutinise a claim that doesn’t require receipts.
• The ATO is also concerned about the number of people claiming deductions for conventional clothing. Some retail workers claim normal clothes because their boss told them to wear a certain colour, or items from the latest fashion clothing line. Others think they can claim normal clothes because they only wear them to work.
• Your workplace may expect you to wear clothing items like suits or black pants. But an official ‘dress code’ doesn’t qualify as a uniform and you can’t make a claim for normal clothing, even if your employer requires you to wear it, or you only wear it to work.
• The ATO’s sophisticated data analytics is constantly improving and can identify unusual claims by comparing taxpayer claims to others in similar occupations.
• Data analytics will flag claims that are significantly above the average in occupations that regularly claim for laundry, like chefs or security guards. It will also flag claims made by people in occupations that usually don’t claim, like office workers.

How to calculate your laundry claim

Claiming $150 or less for clothing and laundry (and less than $300 for work-related expenses in total)?

• Make sure your claim is for eligible clothing (occupation-specific, protective or uniform). Remember, you can’t claim for plain or conventional clothing, even if your employer requires you to wear it and even if you only wear it to work.
• Calculate your claim for washing, drying and ironing at:
  • $1 per load if the load is made up only of work-related clothing
  • 50c per load if you include other laundry items
• You may be asked to demonstrate how often you wore your eligible clothing (for example, evidence that you worked three shifts a week for 48 weeks in a year)

Case studies - Clothing claims hung out to dry

• A retail assistant working in a fashion store claimed more than $700 for store brand clothing she had purchased and was expected to wear to work. As the clothing was conventional, she was not able to claim a deduction, and her claim was disallowed.
• A stockbroker claimed the cost of purchasing suits which he regarded as his ‘work uniform’. While many workplaces have a written or unwritten dress code, his suits are considered conventional or everyday clothing and his claim was refused.

Conventional clothing such as black trousers and a white shirt, or a suit, are not sufficiently distinctive or unique to your employer. Clothing in a specific colour or brand isn't enough to classify clothing as a uniform.

CASH IN HAND PAYMENT TO WORKERS NO LONGER TAX DEDUCTIBLE

The ATO has reminded employers that any ‘cash in hand’ payments made to workers from 01.07. 2019 will not be tax deductible.

‘Cash in hand’ refers to cash payments to employees that do not comply with pay as you go (PAYG) withholding obligations. Payments made to contractors where the contractor does not provide an ABN and the business does not withhold any tax will also not be tax deductible from 1 July.

This new measure will take effect for payments made to workers from 1 July 2019 for income tax returns lodged for the 2020 income year onwards and is part of the government’s response to recommendations from the Black Economy Taskforce.

In addition to the loss of a tax deduction, employers caught not complying with their PAYG withholding obligations may be penalised for failing to withhold and report amounts under the PAYG withholding system.

“This new measure is just one of the many ways we’re tackling the black economy”, Mr Holt said.

The ATO take the view that transacting in cash is a legitimate way of doing business, while when cash is used to deliberately hide income to avoid paying the correct amount of tax or superannuation it’s not only unfair, it’s illegal.

Employers who mistakenly classify their employee as a contractor will not lose their deduction where their worker provides them with an ABN. 

The ATO has stressed that payers who attempt to do the right thing but make a mistake do not need to worry; they will not lose their deduction. They have the opportunity to come forward and make a voluntary disclosure which in the case of genuine error will be viewed leniently by the ATO.