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Running a home-based business: Tips on business structure, tax claims and other obligations

Running a business from home has never been more accessible, but it's important to understand the implications on business structure, tax claims and company obligations. Find out more so you can run your home-based business like a boss!

Starting a business is exciting and terrifying at the same time. You’re probably full of ideas and motivated to get cracking, but it can be hard to know where to start. And it can be daunting to finally push the ‘go’ button that takes you on the wild ride of a business owner.

One positive outcome from the COVID-19 pandemic has been the ‘try before you buy’ scenario that has resulted from businesses being forced to work from home. Many people who thought they couldn’t operate remotely are realising they can do it very successfully, and it’s likely that when employees can return to the workplace, many companies will choose to continue some form of remote work.

On top of that, some people have lost jobs and have been forced (or inspired) to start their own business as a result. Also, new business opportunities are presenting themselves that simply weren’t there before the pandemic and change in market conditions.

With this surge in the operation of home-based businesses, we’re getting lots of questions about how to successfully and legally run a business from home, including:

  • How should I structure a home-based business?
  • What expenses can I claim when running a business from home?
  • What insurance do I need for a home-based business?
  • What licences and registrations do I need for my home-based business?

Below are some key tips from our BlueRock lawyers and accountants, which will help kick-start you into the world of running a successful home-based business.

How to structure a home-based business

One of the first and most fundamental decisions is 'how to structure your business'? Unfortunately, there is no cookie cutter solution, but the importance and future costs\ savings associated with getting this right from the start is significant.

The different ways to structure your businesses each have pros and cons, so take the time to understand them. The most common business structures for home-based businesses are:

  • Sole trader
  • Company
  • Partnership
  • Trust (includes unit trust, discretionary trust and hybrids)

Your business structure will impact your entitlements, tax implications, liability limitations and reporting obligations.

Once you’ve decided on your structure, the next steps involve getting your registrations in place. These steps take you through how to register your business:

  • Register your business name 
  • Apply for an ABN (Australian Business Number)
  • Register for the Goods and Services Tax (GST) (if you are expecting to have income greater than $75,000 in the year or if under you may still wish to register to claim input tax credits on things you acquire to run your business)
  • Apply for a Tax File Number (if you are using a new structure)

What expenses to claim if you run your business from home 

When starting any business you have a number of tax obligations and claims, but if you’re running a business from home you’ll have some more specific considerations.

There are essentially 2 types of expenses involved in operating a home-based business: 

  • Occupancy expenses: expenses you pay to own or rent your home (for example rent, mortgage interest, rates, land taxes, etc)
  • Running expenses: increased costs from using your home facilities for business (for example electricity, cleaning costs, phone and internet, etc)

These expenses are effectively tax-deductible where you use a room exclusively or almost exclusively for your business activities. We recommend keeping records of the number of actual hours you work from home during the income year, which will keep your options open and ensure that you can maximise your deductions.

Hot Tax Tip: COVID Shortcut Method

This method can be used from March 2020 to September 2020 only. It allows you to claim 80 cents per hour, and can be used where there is no dedicated space; however, if you use this method, you can't claim any other expenses from working from home for that period.

How does this method stack up? When tested on a 40-hour week, if, for example, your phone and internet monthly bills (for work purposes) are more than $48 (combined) per month, then the old fixed rate (52 cents per hour plus phone and internet) will achieve a greater deduction.

So, this method might save time but not tax. 

Hot Tax Tip: Main Residence Exemption 

The main residence exemption is one of the best tax exemptions available. It means no capital gains tax on the disposal of your home, however, it's important to understand that if your home is your primary place of business, you may only be entitled to a partial exemption. 

But don't let it scare you off, because:

  • You only pay capital gains tax for the periods when you used your home for your business
  • Usually, it’s only a percentage of the capital gain that is taxable, equal to the percentage that you would claim a deduction for mortgage interest (based on floor space)
  • Small business concessions may be available to reduce any capital gain. 

When thinking of establishing a home-based business, getting a valuation of your home once you begin to use it as your place of business will help to ensure that your capital gains tax is kept to a minimum.

Hot Tax Tip: Instant Asset Write-off

The government recently extended the current relief for the $150,000 instant asset write off for eligible business to 31 December 2020. As a result, the initial investment in assets required to set up your business can now be claimed as a deduction sooner, which makes it a great time to set up your home office with the assets that you need to run your home-based business.

Insurance for home-based businesses 

If you’re running a business from home, there are a few key insurance policies you should factor in.

  • Public Liability (particularly if you have clients that come to your home as part of the business)
  • Professional Indemnity (which helps covers the cost of litigation)
  • Product Liability (protects you against damage caused by products sold or supplied)

What licenses and registration do you need for your home-based business?

There are different regulations that govern working from home depending on your state, territory and local government. These will also vary according to your location and industry.

The impact of your business on the surrounding area is an important consideration. If you live in a predominantly residential area you may need to obtain special permission. It’s highly likely that you will need a range of permits relating to zoning, signage, noise levels, health issues, pollution, energy use and parking.

Can I run a home-based business from a rental property?

Tenants may run a home-based business, but you need the approval of your landlord and the predominant use of the premises must be as a residence. In addition, there are special conditions tenants must comply with.

The tenant will require home-based business insurance and the landlord will likely check your certificate of currency on an annual basis. A special condition may be included in the tenancy agreement specifying that the insurance remains current and the landlord assumes no responsibility for risks associated with the running of the business.

The landlord will insist that all council approvals and licensing requirements have been obtained. It’s important that both the tenant and the landlord do their research but, ultimately, the decision will be at the discretion of the landlord.

Getting started with your home-based business

Now that you have a few tips on the structural and tax implications of running a home-based business, you can enlist the help of an advisor (where help is needed) and move forward with confidence, knowing you have a robust foundation in place. 

The next step is to create an effective business plan, which will give you a tactical roadmap to help you plan, track and measure against your key business goals.

Feel free to get in touch with a BlueRock advisor if you’d like to talk through your home-based business set-up and goals. Believe it or not, it’s a great time to be in business!

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