Capital gains payable on home used by a business

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This was published 5 years ago

Capital gains payable on home used by a business

By Max Newnham

There is a common misconception among business owners and some accountants, that a business owner should not claim a tax deduction for expenses related to a business being operated from a home.

The reason being when part of a home is classed as business premises, and a tax deduction is claimed for expenses relating to the home, it results in a portion of the profit when the property is sold as being liable for Capital Gains Tax. But this does not necessarily result in tax being paid on that gain.

Running a photography business from home does not automatically mean you lose the CGT exemption.

Running a photography business from home does not automatically mean you lose the CGT exemption. Credit: Mattia Pelizzari

There are strict rules that apply to classing a portion of a home or property as business premises. Where a separate structure has been erected on a property, such as a shed used for operating a business, it is clear that a portion of the property expenses can be claimed as a tax deduction.

However, for the portion of a home to be classed as business premises it must be separate from the rest of the home, in other words it must be a room and not part of a room that is also used for private purposes, and it is best if it has its own entrance.

When a part of a home is classed as business premises expenses such as rates and a portion of the home loan interest can be claimed as a tax deduction.

Q. I am currently a full-time employee and thinking of starting a small photography business at my home using a trust or company. Will I be required to pay CGT when it comes to selling my home? If I purchase a new car through the business can I claim depreciation and offset it against my employment company?

A. Simply operating a business from a room in your home does not automatically result in you losing the CGT exemption. If the business premises tests cannot be passed a tax deduction is limited to home office expenses such as gas and electricity related to the business usage and phone and internet charges.

If you pass the business premises test, and claim the property costs such as rates and interest on a mortgage, a portion of the home would become liable for CGT when it is sold. This is not really a problem, unless your business is turning over more than $2 million a year, as you will be eligible for the small business CGT exemptions on the assessable part of the profit made on the sale of your home.

There is a general income tax principle relating to claiming deductions for expenses that equally applies to both businesses and employees. Simply put, for an expense to be tax-deductible there must be a connection with the income earned.

This means expenses related to earning employment income are deductible against that income, while expenses related to generating business income is deductible against that income. If you purchased the new car through the business you could only claim a tax deduction for its expenses, based on the business use percentage, against the business income and not against your employment income.

Email questions to max@taxbiz.com.au.

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