Home office CGT deductions through my superannuation

Q:

Q: I CURRENTLY use the study in my home as a business office. Will this attract CGT when I sell my home? If the office portion of the home does attract CGT, when I sell my home can I roll over the CGT component into my super to forego paying the CGT?

Our expert is Adrian Raftery, aka ‘Mr Taxman’, an award winning Chartered Accountant and Certified Financial Planner.

A: Generally a home has a main residence exemption from capital gains tax, including when you bring ‘paid employment’ work home. However this exemption is partially reduced when you operate a business out of the home.

Doing work at home after hours

When you take work home with you to do it after hours, your home office is considered a place that has been set up to assist you in earning your income which is derived from outside of the home. Tax deductions are available for some electricity and power, depreciation on any office equipment and furniture, as well as any business telecommunications costs. Importantly there is no capital gains tax as the main residence exemption remains intact.

Operating a business from home

When your home is being used as a business office you are entitled to the same income tax deductions above plus a portion of the mortgage interest expenses, insurance, council rates, and so on. But that portion of the home through which the business is run is subject to capital gains tax.

It has been suggested that if you don’t claim these expenses then you are not liable to the capital gains tax. This is wrong. The law is clear and states that capital gains tax is payable on that portion of the home used for running the business when:

• the home was acquired on or after 20 September 1985
• part of it was used to produce income at some time when it was owned; and
• the taxpayer would be entitled to deduct interest had it been incurred on money borrowed to buy the home or an interest in it.

When calculating the capital gains tax, the ATO allows the taxpayer who does run a business from home to have acquired the home for its market value on the day when the property was first used to produce assessable income. Accordingly, it is recommended that any person running their business out of their home obtain a market valuation of their home at the time the home starts to produce income.

Where an area of the home is used to operate a business, the ATO says that the deductible portion of running expenses (e.g. interest, rents, rates, repairs, cleaning, insurance, etc) should be calculated on the percentage of total floor area that is represented by the relevant room or rooms.

Please note the following tests to determine if the floor area constitutes a genuine place of business:

• it is clearly identifiable as such;
• it is not readily suitable or convertible for private use as part of the home;
• it is used exclusively for carrying on the business;
• and it is used regularly for customer or client visits.

CGT exemptions

The good news. A capital gain from the sale of a business asset will be exempt up to a lifetime limit of $500,000. However if you are under 55 years of age, the exempt amount must be paid into a complying superannuation fund or a retirement savings account in order to obtain the exemption.

Where to find out more

You can contact Adrian Raftery at www.mrtaxman.com.au