Tax Question re rent expense

Sim - You got it. These is a notional test that applies. It considers IF you would have been entitled to claim any interest as a deduction (even if you have no loan) then the same CGT impact will arise.

So a person using the home as a cornershop with a attached residence would have a apportioning issue. Partial loss of main res exemption and partial deduction for ownership costs available. A person with a home office (eg a mortgage broker, insurance agents etc) would generally not.

 

One question commonly asked...

If I operate a company with the reg office / PPOB as my home address will that lead to tax issues ??

Answer : No. The activities within that address are a primary issue not the presence of a company address. eg : A home based hairdresser with studio (Yes) a dental surgery (Yes) but a address used merely for postal issues etc then no concern at all.

 

My accountat advised there is tax issue re CGT if you claim home office, however, if you are renting then this would not apply.

The ATO website states PAYG employees can 'generaly not' cannot claim occupancy expenses (e.g. Rent, mortgage interest on PPOR). From what i gather, my scenario would only work if i were self employed (which i will eventually become anyways). I will just have to wait untill that time comes to be able to deduct occupancy expenses.

To put it into perspective, my goal is to have a large property investment portfolio & then rent in Sydney CBD (which will doube as my office). I am trying to find the most tax effecitve way to do so as the thought of spending 600-1000 p/wk rent as essentially 'dead' money doesnt sit well with me.

 

Yes - but not if you are renting.

 

As a general rule, expenses associated with a taxpayer's home are of a private or domestic nature and are not tax deductible. However, in the case of a home office, there are two exceptions to this general rule. A deduction may be allowable if:

• part of the home is used for income producing purposes and has the character of a 'place of business' or
• part of the home is used in connection with a taxpayer's income earning activities but does not constitute a 'place of business'.

If an area of the home has the character of a 'place of business' then some part of both occupancy and running expenses may be deductible. Occupancy expenses relate to the ownership or use of the home and include expenses such as interest, insurance and rates. Running expenses relate to the use of facilities within the home and include expenses such as electricity, cleaning costs and depreciation. However, where an area of the home is simply used in connection with income producing activities, but does not have the character of a place of business, only running expenses are allowable.

 

Where the activities are characterised as a home office s118-190(1) DOES NOT apply and a full main residence exemption is available. Refer to IT 2673. http://law.ato.gov.au/atolaw/view.htm?locid='ITR/IT2673/NAT/ATO

It deals with the ole section of the act but the Commissoner's views are still the same.

 

And what many taxpayers think a business is can be different to what the ATO think a business is when it comes to the above tests Mike refers to in IT 2673.

eg Personal services, contractors arrangements, home based study / office and not an actual place of business, a office of convenience (ie telecommuting a few days a week), incidental use of the home eg archive storage in garage. B-Mac's view about waiting until self employed a good example of possible concerns. Self employment doesn't make any costs deductible as such...More to it than that.

I generally recommend that anyone thinking of claiming occupancy costs need to have a second opinion to avoid a later allegation of recklessness.

 

Roger that. Thanks mate.

 

Guys,

What about this scenario:

1) Continue with my employer as PAYG Employee

2) Set up small business on the side (Sole Trader ABN) and invoice my customers for services which are over & above the role of my PAYG role, however are somewhat related. These additional services will generate roughly $20k p.a. over the next 12 months and grow to circa $100k within the next 3-5 years, at which stage i will cease employment with my employer and be fully. self employed. Initially, my curent cemployer will be a customer of mine & i will invoiceing them (any issues here?).

I should be entitled to the following deductions:

a) 25% of my aparmtent is used soley for business (work, meetings etc) - able to claim 25% of rent (occupancy) expense as a business deduction.

b) Work 24 hours per week on my business - able to claim 34c per hour of running expenses ( electricity, cleangin etc) as business deduction.

c) Able to take advantage of the small business incentive announced on budget night for business related expenses (e.g. purchase $20k car).

 

Aside from the tax situation, what will your employer say about you invoicing your clients on the side?

 

Everthing would be transparent & agreed with my employer prior to going ahead.
Who knows...maybe i wont need to find another clients and my employer with provide me with enough work....?

 

might want to consider this straight from the ATO website

"
Personal Services Income - individuals generating personal services income but not conducting a personal services business

As a result of the operation of the personal services income (PSI) legislation, if you are an individual who generates PSI but do not pass one of the four personal services business tests and do not have a personal services business determination from the Commissioner, you will not be entitled to claim the tax break in relation to your PSI. The PSI legislation provides that individuals who are not conducting a 'personal services business' cannot deduct certain amounts such as amounts that employees cannot deduct relating to their PSI. An employee cannot claim the small business and general business tax break.

For more information about Personal services income see our website and section 85-10 of the ITAA 1997."

 

Thanks Mike,

Understand your point, however, i would be considered a PSB becasue i would satisfy the following 3 criteria:

1) Paid to produce a Specific Result
2) Requied to provide own equipment/tools
3) Required to have mistake fixed at own expense

Aditionaly, My business will market to the public via social media, a website (eventually) & my client base will spread to up to 40 possible customers as my career progresses. This means i also pass the "unrelated clients test".

Mike, are you a Sydney based accountant? If so, i am clearly in need of one to set this structure up if this is something you can assist me on can you please PM me your contac details?

Thanks

 

B-Mac i work virtually so don't have a base in Sydney. Happy to deal with people via skype and phone but past experience has shown me many clients prefer a face-to-face consultation and relationship with their accountant.

Paul (Paul@PFI) is based in Sydney and based out at Pennant Hills so a pretty easy and pleasant drive.