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Tax tips for home-based businesses

Running a business from home provides a number of cost and lifestyle benefits, including a range of eligible tax deductions.

Home-based businesses provide an opportunity to save on rent, the time and cost of commuting while providing flexibility in your work hours. It can also provide valuable ‘breathing space’ while you grow your business.

Eligible tax deductions for home-based businesses

You can claim the business-related portions of your home expenses, such as:

  • electricity, gas and water
  • home telephone and internet
  • repairs and depreciation to your home office furniture, plant and equipment (computer, printer, etc)
  • stationery and other consumables

In some cases you may be entitled to claim home occupancy costs such as:

  • interest on your home loan or rent
  • rates and taxes
  • insurance

Eligibility criteria for claiming home-based business tax deductions

To be eligible to claim these tax deductions, the area used for running your home-based business needs to meet the following criteria:

  • clearly identifiable as a place of business
  • not readily suitable for private use
  • exclusively used for business purposes
  • regularly used for visits by your customers

For example, in the case of the partial conversion of a private home to accommodate a home-based hairdressing salon – the area used as the hair salon must be clearly identifiable as a salon and regularly visited by customers accessing the service.

Be aware of capital gains tax

If you have been claiming home-based business expenses and decide to sell your home, it’s likely that you’ll have to pay capital gains tax on the sale of your property.

The capital gains tax applies to the portion of your home which is used to generate business income. To help you avoid paying more tax than necessary, have your home valued at the time you decide to start your home-based business.

How to calculate the percentage of your home used for business

The formula below can be used to calculate the percentage of floor space used for your business.

Floor area / total floor area x 100

An example of this formula in action is:

  • A home-based office takes up 5m x 5m of your home = a floor area of 25sqm
  • The total floor area of your house is 123sqm
  • The percentage that can be claimed for your home business is 25/123x100 = 20.33%

Apply this percentage to your occupancy costs e.g. council rates of $2000 x 20.33% = $406.60 of your council rates is tax deductible.

More information

Visit the ATO for more information on claiming business expenses or contact our free small business advisory service for more help on starting and running a home-based business.

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