This year the ATO is paying extra attention to people whose work-related expenses are higher than they have been on past returns.

For this reason, it is important to understand whether or not you can make a claim for your home office before claiming those costs as a tax deduction.

A home office falls into one of two categories:

• A place of business; or
• A private study.

The first category is mainly in relation to self-employed taxpayers. A place of business is a part of a residence that is set aside exclusively for the carrying on of a business. For artists and other creative professionals, this area cannot also be a private space. Part of a bedroom or a lounge room may be used as a studio, but these spaces would not count as home offices for tax purposes because their primary use is private.

Employees may also operate a home office as a place of business, but these claims are restricted to circumstances where there is an absence of an alternative place to conduct income producing activities. A musician employed by a group may not be provided with a place to work because of touring and recording commitments. Television and film producers on salary may need to use their homes for business at night following a day of field work.

The second category is in relation to employees that maintain a private study at home for their own convenience. A teacher may prepare lessons or mark assignments at home but their place of business is the school where they perform their duties. The ATO will consider a taxpayer to have a private study rather than a place of business when there is no requirement for them to work at home, it is not necessary to do so and the home office is not used substantially to generate income.

A home office used as a place of business attracts tax deductions for both occupancy costs and operating costs. A private study is eligible to claim only operating costs.

Occupancy costs include rent, mortgage interest, council rates, water rates, land rates, insurance premiums and whole of residence repairs. These costs are apportioned by working out the percentage of the floor area of the home office compared to the residence. A home office of 15 square metres in an apartment of 75 square metres will be allowed a tax deduction of 20% of its occupancy costs.

Operating costs include cleaning, electricity and gas, repairs, depreciation and leasing expenses. These may be claimed by either applying a set rate for the time a taxpayer works in the home office or by claiming a percentage of actual costs. Either way, a diary will need to be kept for a sample period to document the amount of time spent in the home office.

Finally, there are capital gains tax considerations to making home office claims as a place of business. If a home office constitutes 20% of a residence, a capital gain will need to be declared at 20% of the profit made to its cost base during the time that the home office was operated. Conversely, a capital loss could result if a residence was sold at a loss.

There are a number of factors peculiar to capital gains tax that taxpayers should take into consideration, including:

• CGT discount – a discount of 50% applies to capital assets as long as they are held for 12 months or more;
• Percentage of use – if a home office exists in a residence for five years as a private study and five years as a place of business then only 50% of the capital gain will be assessable income (and 25% will be taxable income with the CGT discount); and
• Residency – non-resident taxpayers, including Australians with periods of foreign residency, must meet certain criteria to be eligible for the CGT discount.

The decision to claim a home office as a place of business in an owned residence should be made on a projected cost benefit analysis, calculating the tax deductions against future taxable capital gains.

For example, if deductible interest and other costs on a home office will be about $4,000 per year, the home office takes up 20% of the floor area and you intend to continue living in the residence for at least five years, you will be better off making those home office claims as long as the residence does not increase in value by $200,000 or more during that time.