If you run your home-based business as a company or trust, your business should have a genuine, market-rate rental contract (or similar agreement) with the owner of the property. The agreement will determine which expenses the business pays for and can claim as a deduction.
If you have an area of your home set aside as a 'place of business', you may be able to claim both occupancy expenses and running expenses. Where you run your business from home and don't have an area specifically set aside for your business activities, you can still claim running expenses.
If personal services income (PSI) rules apply to your business, you may not be able to claim occupancy expenses. You can use the PSI toolThis link opens in a new window to work out whether you earned PSI, and if the PSI rules apply to that income.
If there isn’t a genuine rental contract, there may be tax implications for the property owner and the business for providing benefits to them.
Implications when you are both the business owner and an employee
If you're both the business owner and also an employee of the business, and the business pays for or reimburses you for some of the expenses of running the business from home, you can't claim a deduction for the expenses in your individual income tax return.
The business will have to pay fringe benefits tax (FBT) if it pays or reimburses you for the expenses as an employee. Certain exemptions and concessions may apply to reduce the FBT liability. Additional records may need to be kept for FBT purposes.
Example: company with a rental contract
Gary is a music producer who runs his business – Gary's Tunes Pty Ltd – as a company from the home that he owns.
Gary's house has a dedicated studio space where he keeps his music recording and editing equipment and computer. He bought these using his company account and only uses them for the business.
Gary's Tunes Pty Ltd has a formal rental agreement with Gary 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.
Gary's Tunes Pty Ltd claims tax deductions for:
- rent paid to Gary
- the full cost of the music equipment and computer as depreciating assets.
Gary must report the rental income that he receives from his company in his personal income tax return. He can claim a deduction for his expenses associated with making that income.
End of example