With the current lockdowns, more and more businesses are relinquishing their rented premises and moving their business to their home. This month the government released some valuable information to assist businesses that have moved home to optimise their deductions. 

Here are a few you should carefully consider:

If you’re a sole trader or operate your business as a partnership, you may be able to claim some running expenses if your home is your main place of business. This can include the cost of electricity, cleaning, and depreciation of business assets.

You can use one of the following methods to calculate your expenses:

  • actual cost method
  • 52 cents per work hour fixed rate, which covers heating, cooling, lighting, cleaning and depreciation of furniture and furnishings
  • 80 cents per work hour temporary shortcut method and covers all expenses.

The methods cover different expenses so keep good records and check the details to see which works best for you.

You may also be able to claim occupancy expenses if you have a specific area of your house with the main area of a place of business is set aside. This would not include, for example, your dining room table.

If your business is a trust or company, you should have a market-rate rental contract. This will determine what expenses you may be able to claim as a deduction.

You can only claim deductions for the portion of your expenses related to running your business.

Remember, registered tax agents and BAS agents can help you with your tax.

What you can claim

There are three golden rules for what we accept as a valid business deduction:

  1. The expense must have been for your business, not for private use. For example, purchase and designate cleaning products that you only use for your business activities and business spaces. If the expense is for a mix of business and private use, you can only claim the portion that is used for your business.  It this therefore best to separate them.
  2. You must have records to prove it.

For example, if you buy a laptop and you only use it for your business, you can claim a deduction for the full purchase price. However, if you use the laptop 50% of the time for your business and 50% of the time for private use, you can only claim 50% of the amount as a deduction.

You can’t claim the GST component of a purchase as a deduction if you can claim it as a GST credit on your business activity statement.

As our industry requires that you have physical contact with your clients, you can claim deductions for expenses related to COVID-19 safety. This includes hand sanitiser, sneeze or cough guards, other personal protective equipment, and cleaning supplies.

What you can’t claim

There are some expenses that are not deductible, such as:

  • entertainment expenses
  • traffic fines
  • private or domestic expenses, such as childcare fees or clothes for your family
  • expenses relating to earning income that is not assessable, such as money you earn from a hobby
  • the GST component of a purchase if you can claim it as a GST credit on your business activity statement.

When you can claim your deduction

The type of expense – operating expense or capital expense – determines when you can claim your deduction. Generally, you can claim:

  • operating expenses (such as office stationery and wages) in the year you incur them
  • capital expenses (such as machinery and equipment) over a longer period.

For operating expenses, you generally incur the expense when you have a legal obligation to pay for the goods or services. An invoice is not necessary for an expense to have been incurred, but you do need a record of the expense.

If you use an item in your business for only part of a year, you generally need to restrict your claim to the period it was used for the business.

Claiming a deduction for a prepaid expense

There are different rules for expenses you pay in advance – that is, expenses you incur now for goods or services you will receive (in whole or in part) in a later income year.

Where the expense is $1,000 or more, you will usually need to apportion (or distribute) the expense across the whole supply or service period if you:

  • won’t receive the goods or services in full within 12 months
  • are not eligible for an immediate deduction.

There is also a great video that summarises this information that you may wish to check out.