Rogerson Kenny Business Accountants Melbourne

Running Your Business From Home

Research suggests that there are nearly 1,000,000 home based business owners in Australia.
Your first step is to contact your local council's planning department to get a copy of their specific guidelines for home-based businesses. To contact your local council, use the "Find Your Local Council" search at the Department for Victorian Communities website.

Generally speaking, you can run a home-based business if:

• The home is your main place of residence
• You employ no more than one person who does not live there
• ]The total floor area used in the business is not more than 50 square metres, or one third of the total floor area of the home
• The business does not use more electricity, gas, or water than normal domestic usage and it does not decrease the attractiveness or value of the neighbourhood (e.g. by creating an excessive amount of noise)
• Nothing is offered for sale, except goods made or repaired on the site
• No vehicle is fuelled, serviced or repaired on the property
• Only one commercial vehicle, not exceeding two tonnes capacity and registered to a resident, is present at any time

Tax Deductability

As a general rule, expenses associated with your home are private and you can't claim them as a tax deduction. However, in circumstances where you run your business from home you may be able to claim deductions for some of the expenses relating to the area you're using for business purposes. The expenses cover two broad categories - Occupancy Expenses and Running Expenses.

• Occupancy Expenses are related to the ownership or rental of the home and are not affected by income earning activities. These expenses are incurred regardless of whether or not you are carrying on a home-based business. Occupancy expenses include rent, mortgage interest, rates and house insurance.
• Running Expenses relate to the use of facilities within the home including electricity, cleaning, depreciation and repairs to furniture and equipment in the office. These expenses would be less if you didn't run the business from home.

What is Required?

Where you have an area set aside exclusively for business activities is must have the character of a 'place of business', including being:

• Clearly identifiable as a place of business (e.g., a sign at the front of the home)
• Unsuitable to be used for private purposes in association with the home (e.g., not suitable for someone to sleep in)
• Used almost exclusively for carrying on a business; or
• Regularly visited by clients

Common examples are:

• Small business operator's main office
• Tradesperson's home workshop
• A Doctor or Dentist's surgery or consulting rooms

How Much Can You Claim?

Generally you can claim the percentage of occupancy expenses (rent, interest, rates, insurance) that relate to the area you use for the business. Commonly the claim is based on the floor area used for business, as a percentage of the total floor area of the home. Utility expenses must also be apportioned. If the apportionment is not based on floor area you will need to clearly document the basis of calculation.

A telephone used exclusively for business can be claimed (i.e., rental and calls) but not the installation costs. If this phone is used for business and private use then the business portion is deductible, based on an itemised account. If an itemised account is not available you would need to keep a record for a 'representative' four-week period to establish a pattern of use for the whole year.

Travel Expenses

Generally, travel between your home and place of work is considered a private expense. If your home is your principal place of business then you can claim the costs of trips between home and other places as a cost of running your business.

Capital Gains Tax Consequences

Generally you don't pay Capital Gains Tax (CGT) on the sale of your principal place of residence. However, if you use your home as a place of business and claim a tax deduction for some of your mortgage interest then you will have to pay CGT if you make a capital gain on the sale of your home. The exposure to CGT will be based on the proportion of your home that is used for business purposes.

Insurance for Home-Based Business

As a home-based business you need to make sure you have the correct type and level of insurance to protect you and your assets. It is an alarmingly common misconception among home-based business operators that their business is adequately covered by a standard home and contents insurance policy. It's important to also note that many policies don't cover tools of trade, office furniture or computer equipment used for your business unless you have specifically advised your insurer.

For home-based business owners there are several types of insurance to consider:

• Public liability cover for persons visiting your business at home (e.g., customers and suppliers)
• Workers compensation for any employees working from your home
• Fire, storm and theft cover for loss of any stock and equipment
• Professional indemnity insurance (especially the service industry or contracting to Government)
• Personal income protection insurance
• Costs arising from interruption to your business

Public Liability

If your business requires your customers or the general public to visit your home, you should consider taking out a separate public liability insurance policy.

There is no legal requirement to have public liability insurance, however, one claim could put you out of business. You may also find that, depending on the type of work you do, some clients insist that you have public liability insurance as a term of your contract.

You can obtain public liability insurance via your insurance broker. It is very important that you discuss with your broker all the risks arising from your work activities so that a policy covering the main issues can be obtained. For example, if your business involves maintenance or modification to your clients' premises you will need cover for any damage caused, which may not be a standard part of all public liability policies.

Burglary Insurance policies cover theft of property and damage by burglars, following forcible entry to your premises. Under some policies you can also claim for business interruption. This type of policy does not cover theft by a shoplifter or staff.

Business Interruption of Loss of Profits insurance provides cover if your business is interrupted through damage to property by fire or other insured perils. It ensures that your anticipated net profit is maintained and pays your employee's wages, ongoing costs and additional working costs if alternate facilities are necessary. Normally, payment of a claim under this policy is conditional on your business being re-established.


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