CGT – When being eligible is also being liable

September 3, 2015


One of the financial benefits of operating a home-based business, aside from not having to pay for commercial space rent, is being able to claim the costs of running that business as a tax deduction. The downside of course, is that if you bought your home after 20th September 1985 then sell it and enjoy a profit, you will have to pay capital gains tax on that profit. But did you know that this applies even if you didn’t claim any expenses during the time you ran your business from your home?

Many home-based business owners believe that to be liable for CGT on the sale of their home, they must first have made a claim for a tax deduction on their occupancy costs (eg. claiming a share of the mortgage interest) BUT that is not the case.

Let’s go back and explain this from the beginning…

If you run a home-based business you can claim the associated costs as a tax deduction. The two types of expenses that can be claimed are categorised as:

• Occupancy expenses – such as rent, mortgage interest, council rates and house insurance premiums;
• Running expense – such as power, gas, equipment depreciation, etc.

To explain the CGT ruling, we’re looking only at “occupancy expenses”. To be able to claim these expenses, you must first pass the “interest deductibility test” and to do so you must have a space in your home solely allocated to operating your business. It must also be:

• clearly identified as a place of business, eg. by displaying a sign on the property;
• allocated area for your business only (it’s not shared with or suitable for domestic purposes);
• an area your clients visit.

So once you’ve passed that test, you can then claim your occupancy expenses. But what if you don’t claim those expenses – say you don’t have a mortgage on your home? This is where it gets tricky.

The law as stated by the ATO is, “If you satisfy the interest deductibility test, you must account for any capital gain you make when you sell your home. You may satisfy the interest deductibility test even if you did not:

• Borrow the money to buy your home; you must apply the test on the assumption that you did borrow money to buy the home;
• Claim mortgage interest as a deduction.”

This means that because you are eligible to claim the occupancy costs, you are also liable to pay CGT.

If you are earning an income working from your own home, talk to your adviser to ensure you will meet your tax obligations if you sell your home.

Australian Tax Office – Home-based business (June 2012) – NAT 10709-06.2012

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