Do home office expense claims affect the main residence exemption?

Due to the COVID-19 public health crisis, many taxpayers commenced working from home for the first time during 2020. Deductions for ‘home office expenses’ may be available under s. 8-1 and Div 40 of the ITAA 1997 (general deductions and depreciation respectively).

Types of home office expense deductions

Deductions incurred in working from home are available where:

• an area of the home is used as a ‘place of business’;
• a room is used as a ‘study’, ‘home office’ or other ‘work area’ as a matter of convenience; or
• no particular area of the home is used, but work is performed at home.

Whether an area of a home is a place of business is a question of fact. A place of business is most likely to exist where an area of the home is set aside for carrying on a business by a self-employed person or for use as a taxpayer’s sole base of operations for income producing activities e.g. where no other location is provided to an employee by their employer.

An area that has been set aside in a home will, or is more likely to, have the character of a ‘place of business’ if the area is:

• clearly identifiable as a place of business;
• not readily suitable or adaptable for use for private or domestic purposes in association with the home generally;
• used exclusively or almost exclusively for carrying on a business; or
• used regularly for visits of clients or customers.

TR 93/30 sets out the Commissioner’s view on when an area of a home is considered to be a place of business.

Home office expenses fall into two broad categories:

• 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);
• 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 Commissioner is of the view that in most cases the apportionment 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 (TR 93/30).

The following table sets out when occupancy costs and running expenses may be deductible:

The CGT impact of working from home summary

• where the taxpayer has a place of business in their dwelling and claims occupancy expenses — the taxpayer’s entitlement to the main residence exemption (MRE) will be reduced proportionately; and
• where the taxpayer does not have a place of business in their dwelling and only claims running costs — working from home has no impact on the taxpayer’s entitlement to the MRE.

For any further questions related to this matter please get in touch with your accountant from PrimAccounting on 02 9415 1511 or email [email protected].