Claiming non-property related expenses when working from PPOR

Hi tax gurus,

My new PPOR has office space that I will be working out of.

I don't want to claim interest or rates, but if I claim power and internet costs will that affect my CGT free status should I ever sell?

Thanks!

 

IT 2673

s 118-190 (only allowing you a partial exemption if you use part of your dwelling for income producing purposes) does not apply where you have a 'home office' as opposed to a dedicated area used as a place of business.

The test is if you could claim the interest on the part of the house used. But I take it Jess that you are operating through a company so you could not claim the interest anyway - unless you entered into a formal lease with the company.

See
TD 1999/71
Income tax: capital gains: does section 118-190 of the Income Tax Assessment Act 1997 reduce your main residence exemption if part of your dwelling is used by someone else for an income producing purpose ?

(no was thhe answer!)


Example

7. David owns a 6 bedroom home which he and his wife Sophie have used as their main residence since it was purchased in 1995. Sophie has a physiotherapy practice and the two front rooms of the home are used exclusively by Sophie for her practice. Sophie and David live in the remainder of the home. If David had incurred interest on money borrowed to acquire the home, he could not deduct any of that interest under section 8-1 because it would not be incurred in gaining or producing his assessable income. Because David would not be entitled to any interest deduction, section 118-190 does not apply to reduce David's entitlement to a main residence exemption when a CGT event happens in relation to the dwelling.

 

Hi Terry,
I own the house in my name but the biz is owned by a trust - corp trustee. I'm the sole director. Does that apply the same way as above?

 

The company is a separate legal entity so you could not claim the interest

 

Perfect - but can I claim power and internet without having any CGT issues?

 

Take care with the company v's home owner issue. The key words are "to produce income". It doesnt matter who or how and even really how much (although a hobby isnt a business). The theoretical test for interest deductions considers a range of ifs.

Place of business isnt what all think it is. ie a online shop may be a mere home office or could be a office + warehouse.

And the main use test can be found here Running your business from home

 

If the interest deduction test isnt met and you dont operate a business from the premises...Choosing or ignoring available deductions doesnt change the issue. For mortgage brokers etc I recommend you dont have a public place of business at home (no signs, no public access, no parking etc) and also use external venues to meet with clients. ie even their place. A council approval is a sure sign of a problem.

Running your business from home

 

Okay great - thanks Paul that's very helpful.

 

Here is another ATO reference for you Jess
Home-based business

 

Jess, don't assume that you will get the best financial result by maintaining your eligibility for the CGT main residence exemption.

You might find that you could be better off by creating circumstances where you can claim occupancy expenses (e.g. by leasing part of your home to the trust) and you could end up paying little or no CGT because of the application of section 110-25(4). Section 110-25(4) is the 3rd element of the cost base and allows you to add non-deductible ownership costs to your cost base.

Whether this will produce a better financial outcome depends on a number of variables (including the amount of capital gain which is realised). However, it does mean the trust can claim deductions for the ownership costs now while any future capital gain is deferred if and until you sell the property and may then be reduced by the CGT discount.

 

Another benefit (or is it a concern ?) of claiming occupancy expenses as a deduction is that it excludes the person from operation of s118-192 in the future. That is the special rule which typically imposes the market value as the cost base if a former home is then later rented out. s118-192 cannot be used by anyone who has claimed any deductions for their occupancy costs as it imposes a requirement to pro-rata CGT for the whole period of ownership.

Why do I say benefit v concern ?
In some cases the market value protects a element of the costbase from CGT etc. In this case pro-rata. But I have posted at other times on the concern that a property can fall in value imposing more CGT than would otherwise occur. A concern is that s118-192 doesnt allow ownership costs prior to the rental for ordinary taxpayers from enhancing the costbase as Daniel describes. Fortunately ineliigibility to use s118-192 opens a potentially better tax outcome that isnt always apparent until explained. I will give it a crack.

The benefit that Daniel explains can be significant. Lets assume you claim 20% of ownership costs for the business. Then on sale the other 80% that is otherwise not deductible adds to the costbase of the property PRIOR to determining the taxable portion of the gain. So you get to increase the costbase by 80cents to the dollar and then calculate the capital gain as say 20% of that. This is then reduced by 50%. Just remember that you cant create a CGT loss this way. But over time its surprising how the CGT benefit accumulates.

Retain annual records of total occupancy costs and roll these records forward for the future.

 

So in the above question as an example....

I mow lawns for a living as a Pty Ltd operating out of my PPOR, I have a designated area with computer, desk and filing (office) but don't have parking or customers visit.

I should be able to claim some Internet and Power without it affecting my CGT free sale (when I eventually sell) Aka running expenses as detailed by the ATO

If i was to try to claim a percentage of interest/rates, I would then be liable for CGT at sale. Aka occupancy expenses detailed by the ATO

Is this correct @Paul@PFI @Terry_w

 

Yes correct

Except, you probably mow lawns as an employee of a Pty Ltd company.

 

home offices classed as a place of business are also eligible for the small business CGT concessions so may not even need to consider third element costs.

 

Also depends if its personal services income. Personal services income (PSI)

Otherwise info on a home based business is simplified here : Running your business from home

Personal tax advice is required. Remember that even if you are permitted to claim a home office for a home based busienss its also permitted that you dont claim these deductions. Its a choice ! It doesnt necessarily avoid the CGT issue but by not claiming deductions it helps to mask it and who says its a dedicated home office for that purpose only ?? In that case a strategy of not claiming deductions may enable the property owner to diligently record all ownership costs and to then add these to the costbase as third element costs to the extent the deductions COULD have been claimed ... So the CGT issue may even be eliminated. Many people assume a "capital gain" will occur.

In addition these factors may reduce the impact of tax (as well as the small bsuienss CGT concessions)

• proportion of the floor area of your home that is set aside to produce income
• period you use it for this purpose
• whether you're eligible for the 'absence' rule (see Treating a dwelling as your main residence after you move out)

All these factors also water down the concern.

Indicators of a home being a place of business may include

• the area is clearly identifiable 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
  
  
• the area is used exclusively, or almost exclusively, for carrying on a business, or
  
  
• the area is used regularly for client or customer visits.