Home based Business and CGT implications

Discussion in 'Accounting & Tax' started by HungryAccountant, 21st Jan, 2022.

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  1. HungryAccountant

    HungryAccountant Member

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    Hi,

    I just had a few questions regarding a home based business and the CGT implications, I had a quick search on this forum but couldn't find anything.

    I understand that if an individual owns a residential premises that is their main residence, and they convert their garage into a workspace, say a hairdresser salon. They put up signage, use the garage exclusively for business and is visited by clients, in this case they can claim a percentage of interest, rates, depreciation, land tax etc based on the floor area, they will be liable for CGT when they sell.

    What if the person running the business in the garage (sole trader) doesn't own the premises? Say it's the wife running the business while the husband owns the house. I understand you need to look at the interest deductibility test and since she doesn't own the house the test won't pass, so is it as simple as there is no CGT to be paid in this situation?

    What if she ran the business as a company or a trust, does there need to be a rental agreement between the company/trust and the owner of the premises? If so I assume CGT will apply in this case as the house is producing income.

    How about if a car detailer washes cars at home, but has no signage or area specifically set aside for it, just has clients dropping off their cars?

    If there's any links or additional information anyone can provide that would be much appreciated :)
     
  2. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    It depends if rent is charged or not. If a tax entity other than the owner there should be no CGT implications as the interest would not be deductible to the owner. However if they rented it to the other entity this would change.

    See my tax tip on this
    Tax Tip 91: A Non-owner running a business at home Tax Tip 91: A Non-owner running a business at home
     
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  3. HungryAccountant

    HungryAccountant Member

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    Thanks Terry, your tax tip is what I was looking for.

    Does rent have to be charged if it's a company/trust using the premises or is this optional?

    Also the last question in the original post I had, would the car detailer incur CGT?
     
  4. HungryAccountant

    HungryAccountant Member

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    Company or trust home-based business

    "If you run your home-based business as a company or trust, your business should have a genuine, market-rate rental contract (or similar agreement) with the owner of the property. The agreement 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 for providing benefits to you."

    Reading this, it's like the ATO is implying that a rental agreement must be in place?
     
  5. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    I don't think there is a requirement to enter a lease. What the ATO is saying is that interest won't be deductible though if a non-owner is conducting the business.
     
  6. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Its an expectation. Without a lease that is also arms length terms the ATO can deny deductions etc. The ATO generally frown on undocumented rental arrangements and its not uncommon to find the payment of rent isnt arms length or it infrequent or even unable to be demonstrated as paid etc. They may them cancel tax benefits etc. A company etc must "incur" a cost which is different to paying it.
     
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