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Is your home-based business CGT safe? Or will you be hit with a huge tax bill when you sell your family home?
Home-Based Business CGT
If you run a business from home, you lose your main residence exemption – right? Not necessarily.
In this episode Andrew Henshaw of Velocity Legal will show you that running your business from home doesn’t necessarily jeopardise your CGT main residence exemption.
Here is what we learned but please listen in as Andrew explains all this much better than we ever could.
To listen while you drive, walk or work, just access the episode through a free podcast app on your mobile phone.
Main Residence Exemption
There are various ways to bust your main residence exemption. Put your home up on AirBnB. Rent out your granny flat. Or hold your home through a company or trust. To name just a few.
But what about running a business from home? So you still occupy the property as your main residence but you derive income from it by running your business from home.
The popular view is that you lose your main residence exemption – at least parts of it – when you run a business from home. Are they right?
No. Your CGT main residence exemption is safe in most instances. Your home-based business won’t bust your main residence exemption thanks to three rulings issued in 1992 and 1999.
TD 1999/71
If someone else derives income from the property, it doesn’t affect your main residence exemption as the owner. A home-based business is only ever an issue if the business owner also owns the property. If it is somebody else, no problem.
The reason is interest deductibility. The main residence exemption is only affected if you could have deducted interest.
Let’s use an example. Bob is the sole owner of their family home and his wife Sally uses parts to run a doctor’s practice. If Bob incurred interest, he would be unable to deduct the portion for the medical practice, because he is not the one gaining or producing assessable income.
This goes beyond individuals. It also applies to companies and trusts. If the home owner doesn’t own the shares to the company run from home, the exemption is safe. The same applies to discretionary trusts running a business from home.
You need to own the house AND derive income from it to affect your main residence exemption. This is your first lucky escape – TD 1999/71. If this doesn’t help, you go to IT 2673.
IT 2673
IT 2673 is the solution that will apply to most home owners with a home-based business. To jepardise your main residence exemption, the relevant working space needs to be
1 – set aside exclusively as a place of business;
2 – clearly identifiable as a place of business; and
3 – not readily suitable or adaptable for use for private or domestic purposes in association with the dwelling in general.
That is a lot to ask. Most working spaces at home won’t meet any of these conditions, let alone all three.
You probably use your home office for other things, not just work. Watching TV, kids’ homework, hobbies. The list of possibilities is endless.
You probably don’t have a sign outside advertising your business to passers-by.
And your home office is probably easily used for other things of a private or domestic nature. Hanging up laundry, ironing, putting guests up for the night. Again – the list is endless.
And so most main residence exemptions are safe. But if you are one of the few who meet all three conditions, go to TD 1999/66.
TD 1999/66
If you meet all conditions in IT 2673, then TD 1999/66 is your last resort. This ruling talks about what factors are taken into account to calculate the capital gain. This is usually using the floor area, but other methods are ok as well.
If you use 5% of the floor area for your home based business, then 5% of the main residence exemption is up for grabs. If you use 0.5%, then we are talking about 0.5%.
So this one helps to keep the issue in perspective. If you do lose part of your main residence exemption, it is probably not a high percentage.
Conclusion
So if you run a business from home, check these three rulings. They will probably make your home-based business CGT safe. It is actually very difficult for a home-based business to trigger the loss of the main residence exemption.
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Disclaimer: Tax Talks does not provide financial or tax advice. All information on Tax Talks is of a general nature only and might no longer be up to date or correct. You should seek professional accredited tax and financial advice when considering whether the information is suitable to your or your client’s circumstances.
Last Updated on 15 March 2021
Tax Talks spoke to Andrew Henshaw - Director at Velocity Legal - for more details.
