Many small businesses are started from home. In some cases they migrate to premises of their own, while others continue operating from home occupying their own space. In this latter situation the expenses a business can claim will vary depending on tax office criteria. Sometimes a business can claim a percentage of occupancy costs including interest on a loan and rates. However, having the capacity to claim these costs can come at a cost in itself.
Q. I have heard that if you run a business from home, or even if you rent out a room of your home, that the home is then subject to capital gains tax. Is this true?
A. When a business is run from home, the expenses that can be deducted will depend on the facts of each case. To claim occupancy costs, the business section of a home must be clearly identifiable and separate from the residential section.
To meet this requirement, the business section must have its own entrance, it must be clearly identifiable as a place of business, and it cannot be readily converted back to private use. Where a business cannot satisfy these requirements, a claim can only be made for the running costs associated with the business. These would include the business portion of electricity, gas and telephone.
Where the criteria are met, and a portion of the home can be classed as business premises, there can be a nasty shock for the owners. This is because once a residence has been used to produce income, a portion of the profit made on the sale will not receive the residence exemption and therefore could be taxable.
This applies whether the property has been used to run a business or a room in the home has been used to produce rental income. Capital gains tax will be payable in this situation even if no interest has been claimed for a loan relating to the property.
Where a business is commenced from a residence, or is used to produce income, after August 20, 1996 special rules apply to calculate the taxable gain upon its sale. Under those rules, the owner of the property is deemed to have acquired it at its market value at that time.
When the property is sold, capital gains tax is payable on a portion of the gain made. This will be the business-use percentage of the increase in value from the deemed date of purchase until it is sold.
This is a complicated area of the tax act and before making any decisions you should seek advice from an accountant that specialises in this area.
For example, there may be an exception to this special rule if the home owner chooses to treat the home as their main residence when income starts to be produced from the property.
Moreover, capital gains tax may still not be payable if a business has been operated from a property and the owner can access small business capital gains tax exemptions.
Questions on small business tax or other issues can be emailed to firstname.lastname@example.org
Tax for small business, a survival guide, by Max Newnham is available in bookstores and as an ebook.