Small business owners often omit or get things wrong when claiming their business expenses. Among those business expenses, we found the home office and motor vehicle expenses are two common areas where mistakes are made.
In terms of the home office, a lot people know to claim the computer, phone, printer, etc but forget to claim some running expenses such as utilities, work-related furniture depreciation, cleaning expenses etc.
On the other hand, some people over claim their home office expenses in regards to the occupancy expenses, such as the rent, mortgage interests, rates, house insurance, etc.
To claim the occupancy expenses, the room or area you set aside for your business must have characters of business dedication. For example, a clinic room with heavy equipment in a house for a surgeon, a workshop in a garage for a mechanic or a salon room for a hairdresser.
A desk with a computer along with a guest sofa is not necessary a dedicated place for the business; therefore, home office occupancy expenses may not be allowed. One thing we must be aware of is that by claiming the occupancy expenses, it may trigger the capital gain tax when the house is sold.
Home office expenses are usually claimed as a business percentage times the total of above-mentioned expenses. The business percentage is worked out as the size of the dedicated place of business divided by the full size of the home then multiplied by 100%. However, some plant and furniture used purely for the business can be claimed 100%. Please refer to example 1 below.
Dona is using one of her rooms (60 square meters) for her salon business with the whole house measuring 600 square meters. For the year her costs are as follows:
- the utility bill is $2,000,
- cleaning expenses is $1,200,
- the plant and furniture purely used for business is $6,000
- the mortgage interest is $35,000,
- the council rate is $3,200
- and the house insurance is $4,000
As discussed above, the business percentage will be 10% (60/600*100%). The home office running expenses deduction will be 6,320 (2,000*10%+1,200*10%+6,000*100%). The home office occupancy expenses deduction will be 4,220 ((35,000+3,200+4,000)*10%).
Note: The plant and furniture cost have been deducted under the simplified depreciation rule for a small business, which is each item under $20,000 being instantly written off.
Other than the floor area business percentage, there is a couple of other methods which can be used when claiming home office running expenses.
One is the diary record for the actual usage of each item and the other one is 45 cents per hour. Under the diary record method, a diary needs to be used to record four weeks of each financial year, recording the pattern of use of the business place and each time for a non-regular pattern usage.
The 45 cents per hour method simplify the running expenses deduction by the total hours worked in the business place times 45 cents.
The other tax deduction that people can easily get trapped in is the area of motor vehicle expenses. We have seen a lot of people claim everything for their motor vehicle when it is mainly used for private use.
If the business is running under a company or trust structure, a higher margin tax rate of FBT will be applied for the portion of private usage. If the business is running under a sole trader structure, the private portion is not allowed to be claimed.
This doesn’t apply when the motor vehicle is an exempt vehicle and the private portion is limited to home and workplace travel for example a van for a cleaning business, a ute for a tradesman, etc.
After 1 July 2015, motor vehicle expenses can only be claimed under either the logbook method or the cents per kilometre method for a sole trader. Prior to that date, there is also the method of 1/3 expenses and 12% cost method.
Generally speaking, the logbook method gives better tax deductions compared to the cents per kilometre method, given there is a considerable percentage of the business usage. The logbook method requests the business to keep recording the motor vehicle business travel for 12 consecutive weeks. The business kilometres then will be divided by the kilometres of the whole period including the private travel to work out of the business percentage of the motor vehicle usage.
Taxable deductions will be calculated by adding all motor vehicle-related running expenses together, then multiplied by the business percentage. The motor vehicle related running expenses include fuel, repair and maintenance, insurance, rego, loan interest, depreciation, etc. Example 2 will explain this in detail.
Nicolas is running a restaurant business. He uses his car to buy the material and ingredients for the restaurant. He also uses the car for take away deliveries. He uses a logbook to track his business trip for 12 consecutive weeks and worked out that his business travel is 1,200 kilometres and the overall travel kilometres for that period is 2,000. Therefore, the business percentage of his car’s usage is 60% (1,200/2,000*100%). He kept the receipts for the car related expenses for the whole year which shows:
- the fuel cost is $2,500,
- repair and maintenance is $3,000,
- insurance and rego is $ 2,870,
- loan interest is $2,800 (loan on full price $40,000)
- and depreciation is 10,000 (diminishing method)
The tax deduction for his car will be 12,702 ((2,500+3,000+2,870+2,800+10,000)*60%). The cents per kilometre method is quite straight-forward compared to the logbook method. Tax deductions worked out under the cents per kilometre method is done by multiplying the total travelled business kilometres with a set rate (66 cents for 2015 until now; earlier year set rate depends on the engine size of the motor vehicle).
The set rate here covers all motor vehicle related running expenses including depreciation. The maximum kilometres each motor vehicle can claim is 5,000 for per year. There is no requirement for the written evidence, but it needs to provide a reasonable calculation of the kilometres used for business travel.
Say in example 2, Nicolas had a total of 10,000 business travel kilometres for the year. The car related tax deduction will be 3,300 (66 cents * 5,000) under the cents per kilometre method. Note the maximum kilometres he can claim is 5,000 for a year.
As you can see, in this example tax deduction under the logbook method is much more than the cents per kilometre method.
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