Impact on main residence exemption due to home office expense claims

|by Kamil Qureshi|Business Advisory

Due to COVID-19, many taxpayers have now started working from home either temporarily or some taxpayers have now made this as a permanent arrangement with their employers. Due to these changes, many taxpayers now have a designated office space in their homes and can have a list of questions in relation to what expenses they can claim in their tax return for working from home?

Home office expenses fall into two broad categories:

  1. Occupancy expenses — relating to the ownership or use of a home which are not affected by the taxpayer’s income earning activities (e.g. rent, mortgage interest, municipal and water rates, land taxes, house insurance premiums);
  2. Running expenses — relating to the use of facilities within the home (electricity charges for heating/cooling and lighting, cleaning costs, depreciation, leasing charges, cost of repairs).

The ATO is of the view that in most cases the apportionment of the above mentioned category of expenses attributable to a place of business should be made on a floor area basis and, where the place of business only existed for part of a year, also on a time basis.

However, taxpayers need to be aware that where the taxpayer has a place of business in their dwelling and claims occupancy expenses then the taxpayer’s entitlement to the Main residence exemption will be reduced proportionately; and where the taxpayer does not have a place of business in their dwelling and only claims running costs then working from home has no impact on the taxpayer’s entitlement to the main residence exemption.

A capital gain that a taxpayer makes from the sale of a dwelling that is their main residence is exempt from CGT under normal circumstances however, under s.118-190, only a partial main residence exemption is available where, had the taxpayer incurred interest on money borrowed to acquire the dwelling, the taxpayer could have deducted some or all of the interest.

Example:

Michael paid $400,000 for the house and it now sells for $700,000. The capital gain of $300,000 will be exempt under the main residence exemption rule. However, Michael was using 15% of the floor space of his house to work from home and generates taxable income. He also intends to claim interest on mortgage as a tax deduction for that office area. Therefore, Michael will be assessed for:

$300,000 x 15% = $45,000 before CGT discount.

If you need more information on what you can claim as work from home expenses and want to know more about main residence exemptions, then please feel free to contact your trusted advisors at Cordner Advisory on 07 5504 5700.

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