The ATO has reminded taxpayers that, if they run their home-based business as a company or trust, their business should have a genuine, market-rate rental contract with the owner of the property. The agreement will determine which expenses the business pays for and can claim as a deduction.

There are, however, a series of ‘ifs’, as outlined below:

  • If there is not a genuine rental contract, there may be tax implications for the homeowner and the business for providing benefits to any individuals.
  • If an individual earns personal services income (PSI), they may not be able to deduct some occupancy expenses.
  • If the business pays for or reimburses an employee of the business for some of the expenses of running the business from home, the employee can’t claim a deduction for those expenses in their individual income tax return.

Also, the business may have to pay Fringe Benefits Tax (FBT) if it pays or reimburses the individual for certain expenses as an employee and may need to keep additional records for FBT purposes.

Below, is a rental contract example:

Sandra is a violinist who runs her business –String Studio Pty Ltd – as a company from the home that she owns. Sandra’s house has a dedicated studio space where she keeps her music equipment and computer. She bought these using her company account and only uses them for the business. String Studio Pty Ltd has a formal rental agreement with Sandra to hire the studio for $500 per month. The rent covers use of the space and facilities, such as electricity. This is consistent with what it would cost the company to hire a similar studio elsewhere.

String Studio Pty Ltd claims tax deductions for:

  • rent paid to Sandra
  • the full cost of the music equipment and computer, as each item cost less than $30,000.

Therefore, Sandra must report the rental income that she receives from her company in her personal income tax return. She can claim a deduction on her expenses from making that income.

When Sandra sells her house, she may have to pay tax on a portion of any capital gain she makes. The main residence exemption won’t apply to her studio for the periods that she rented it to her company.

 

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