Tame Impala, the name used by multi-instrumentalist Kevin Parker for his project and quite possibly the most acclaimed Australian rock act currently active, recorded his most recent album, the 2015 hit Currents in his home studio located at beachside Fremantle. Not the example you’d think of when you consider the phrase home office but music has a long and storied history with home recordings. Whether something lo-fi like Bruce Springsteen’s Nebraska which was famously recorded in his home using with a 4-track or the state-of-the-art recording studio in Paisley Park where the late Prince lived and recorded more than 20 of his albums since the late 80s, home recording has long been a standard within the industry.
Working in a home office is great, you can still catch up with every match of the Australian Open, wear a pair of boxer shorts during a conference call and best of all, not having to share bathrooms with other people. One added advantage of working from a home office is the deductions you could claim, putting much less strain on your startup in regards to the messy world of small business tax. In general, the deductions and expenses you could claim while running a home office can be divided into two parts, running costs and occupancy costs. Keep in mind however that occupancy costs are restricted to those whose home can be categorized as a primary place of business. If for example, your primary business involve making visits to other people’s home like with Airtasker, it’s not possible for you to claim deductions on occupancy costs.
You keep me running
Running costs in a home office is no different to running costs in an actual office, which are the amount of money associated with the maintenance and day-to-day operation of a business, like electricity bills. The difference lies in the fact you can only claim deductions on these expenses when there are actually additional costs incurred. Like for example if you work as a writer and you write while sitting on the couch in the living room where you also watch reruns of Rake, you can’t claim any deduction on the depreciation of the couch or the TV but if you have an actual office in your home you use specifically for writing, you can claim deductions related to the usage of said room. Examples of running costs include:
- Utility cost for using a room such as cooling and/or heating and lighting
- Phone bills that are business-related
- Equipment and furniture depreciation
- Cleaning costs
To claim deductions on running costs, there are two methods you could use. The easier one is to use a fixed rate of 45 cents an hour to cover electricity, gas and depreciation while the other is to cover the actual incurred expense established through a pattern on use. The latter method requires you to keep a meticulous record of your home office use and the corresponding proportion of the bill (electricity, internet and other utilities) for the minimum of four weeks in a particular financial year. Depending on how you make a living, either would work as an option.
The writer example I used above would be okay going with the fixed rate method, as your expenses probably won’t be that hefty but if you’re working in tech and are working with a team of developers while working on a piece of software that requires you to run a home server, it’s best to go with the latter option. Keep in mind however that the calculation relating to this might get obtusely complicated so you might want to check in with a tax professional first before making any decision. Still, even if you decide to go with the fixed rate option, keeping a record of your own might actually be a good idea to determine whether you’re getting the short end of the stick or not.
Occupancy costs cover any costs related to the occupation of a space, in this case your home office. Like stated above, deductions on occupancy costs are only applicable for those whose home is a primary place of business. To determine whether you could claim deductions on occupancy costs such as rent, mortgage interest and insurance, the Australian Tax Office (ATO) requires you to pass what they call the interest deductibility test. This criterion differs depending on your particular circumstances but the guidelines set upon by the ATO are as follows:
- Clearly identifiable as a place of business, for example, you have a sign identifying your business at the front of your house
- Not readily suitable or adaptable for private or domestic purposes
- Used exclusively or almost exclusively for carrying on your business
- Used regularly for visits by your clients
The method used for calculating the amount of deduction you could claim is rather simple, based on the floor area of your home office compared to the total floor area of your home. For example, if your writing office occupies a 16 m2 space in your 100 m2 apartment, which calculates to 16% of your total living area, then you could claim deductions of 16% on your occupancy costs. Keep in mind however that using your home as a place of business, even for just a short while means that you’re liable to pay capital gains tax or CGT if you ever decide to sell your home.
As with anything related to tax, bookkeeping remains an essential part of the ritual, especially if you decide to claim deductions on running costs based on actual expenses. Sure, the life of a freelance and self-employed worker means not having to kowtow to your boss’ demand on a daily basis but that also means taking a bigger responsibility with your taxes as there’s no Bob from accounting to help you with numbers this time around. Still, as long as you’re properly equipped with articles such as this, I’m sure you’ll be perfectly fine. Probably. Hopefully.