Home Based Business Run Through a Company or Trust the ATO has warned you !

Discussion in 'Accounting & Tax' started by Mike A, 21st Aug, 2019.

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  1. Mike A

    Mike A Well-Known Member

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    Wonder how many home based business run through a company or trust don't comply

    "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.

    Company or trust home-based business
     
  2. Terry_w

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

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    I think that page is a bit misleading.

    there is no need to lease to a company or trust unless expenses want to be claimed and there is a separate area used by the business.

    A broker submitting loans for their company while watching netflix in the lounge room of their main residence should have no tax implications relating to 'rent' if none is being charged or claimed.
     
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  3. Simon Hampel

    Simon Hampel Founder Staff Member

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    Is this new? I don't recall reading that previously.

    I note that the last updated date on that page is 19th August 2019.
     
  4. Terry_w

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

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    Its nothing new, but just general law.

    Imagine you rented a business premises, you would need to show the contract to prove this if audited over the expense payments.
     
  5. Mike A

    Mike A Well-Known Member

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    it's an interest area for the ATO now. Yes was just published a few days ago.

    if the property isn't in the name of the company or trust and claiming home occupancy expenses it makes sense.
     
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  6. Simon Hampel

    Simon Hampel Founder Staff Member

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    Surely a sublease would be sufficient?
     
  7. qak

    qak Well-Known Member

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    What about the otherwise deductible rules?

    ETA: in relation to the FBT issue
     
  8. Terry_w

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

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    A sublease would only apply where a person leased a property and then lease out part of their lease to someone else.

    if it is your own home it would just be a lease.
     
  9. Paul@PAS

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

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    The otherwise deductible rule requires that there be a nexus between the taxpayer (eg Fred) claiming a % of rent for example and the lease. We often see taxpayers operating a company from which they may well earn income as wages and then the company Director seeks to claim a % of personal rent as a cost for the business. The business has no rental obligations...Fred does. Can Fred claim a share of the rent against his income ? Probably not as thats private !!! Has the company paid rent to Fred ? If so it may well be able to claim this - But Fred now has rental income and may claim costs to offset that but a lease / sub-lease or other basis for the company to incur a share of costs needs to be considered. Can the company claim a share of the rent FRED paid otherwise...No. Company didnt incur a cost and has no lease.

    This should explain the nature of the ATO concern. Its basic tax law....A cost necessarily incurred in producing taxable income. This concept is often year one, week one of tax law 101 and can be easily forgotten or glossed over. Its often only given greater technical focus as part of post-grad studies in tax eg Masters, CPA, CA etc.

    This issue is quite common. Most savvy tax advisers know it but some fail to pick it up. A company / trust should not claim a share of private expenses eg rent, electricity etc unless there is a sound basis for it incurring a cost.
     
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  10. Scott No Mates

    Scott No Mates Well-Known Member

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    As you point out, it has to be documented, the expense incurred by the company etc.

    If the company is paying (Fred's personal rent expense as the employee), could it then also be considered subject to FBT?
     
  11. Paul@PAS

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

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    Fred needs to ensure his employer complies with the FBT expense payment rules. I would have concerns about the taxable value being reduced to $0 where there is no lease arrangement between the company and Fred. The nature of the place where the business operates from may assist eg relocation, temporary location, living away etc

    Ideally if the company pays a cost that does not include a private use it may avoid a FBT cost. Situations where the employee resides in company premises however may be a housing fringe benefit.
     
    Last edited: 21st Aug, 2019
  12. Mike A

    Mike A Well-Known Member

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    the main lease agreement may not even allow a sub lease so would need to comply with the terms of the head agreement
     
  13. Trainee

    Trainee Well-Known Member

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    Some clarification might be useful here. If someone runs a business in a company or trust, physically out of their home, and does NOT claim rental expenses, is this an issue?
     
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  14. Paul@PAS

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

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    CGT main residence exemption. Yes. Tax law doesnt not require that costs have to have been claimed. If the home has been used partly for a income producing purpose (even one day or 5% of the area) it affects the main residence exemption. It may also mean an alternative way to calculate the gain / loss is available eg Third element costs. It why I recommend all property owners maintain CGT records.

    Income tax otherwise. Likely not.
     
  15. Terry_w

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

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    It would depend on the circumstances, but if there is no rent being claimed by the company or trust then there would be no deductions, and the person would have no income from rent to declare.
     
  16. Terry_w

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

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    Have a careful read of the legislation.

    From memory, it states something like if the taxpayer was able to claim the interest on the loan...

    see an old tax tip of mine
    Tax Tip 91: A Non-owner running a business at home Tax Tip 91: A Non-owner running a business at home
     
  17. Terry_w

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

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    From TD 1999/71
    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.
     
  18. Paul@PAS

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

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    There is another impact of a home based business. It may permit the business person to count travel from home to clients, suppliers, bank, post office, tax agent etc as a deductible form of travel which is not available to a PAYG employee. The nature of whether the person is a employee, partner or sole trader may impact this. A unpaid Director for example cannot claim any deduction. Any car expenses for a car used by an associate (eg wife) may also be non-deductible or impact fringe benefits.
     
    Last edited: 21st Aug, 2019
  19. Paul@PAS

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

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    Yes. Its the borrowed funds test. It considers if the taxpayer would be eligible to claim a interest deduction had a borrowing existed. I have never understood why they say interest. It could really refer to a rental payment assumption test and be no different.

    Essentially the test for interest deductions is based on property use.
     
  20. Paul@PAS

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

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    A key issue too is often missed by many taxpayers.

    Home based businesses can be :
    A At home - eg a dentist has a surgery in the garage
    B From Home. eg A electrician may perform work at clients but uses the home as a office for accounting, paperwork, booking jobs on PC and warehouse etc

    Question is do you just do SOME work from home ? eg Work at CBA and telecommute one day a week. In which case some extra costs of running a home office may only be allowed

    Is there any area "set aside" is also a good test. That area must have the character of a place of business. eg Identifiable (sign), not readily adaptable to private use (eg a office and shelving etc), used exclusively or almost so for business or receive visitors etc
    A consultant who sits in front of a TV at night and finalises some reports and works at client premises 5 days a week wont meet the interest deductibility test. (May also be Personal Services Income)
     
    Last edited: 21st Aug, 2019

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