Tax Tip 91: A Non-owner running a business at home

A Non-owner running a business at home

The usual case where a business is run at home is that the main residence will lose its CGT free status. Where the home becomes income producing its cost base is reset to market value at the date the interest on the loan is deductible, or where the interest could have been deducted.

So even if you don't claim the interest you could still lose the CGT exempt status.

See sections:

118-185 of the Income Tax Assessment Act 1997
INCOME TAX ASSESSMENT ACT 1997 - SECT 118.185 Partial exemption where dwelling was your main residence during part only of ownership period

118-190 of the Income Tax Assessment Act 1997 INCOME TAX ASSESSMENT ACT 1997 - SECT 118.190 Use of dwelling for producing assessable income

This is not good!

However where the owner of the property is not the one using the property to produce an income this will not apply.


Example

From TD 1999/71
7. David owns a 6 bedroom home which he and his wife Sophie have used as their main residence since it was purchased in 1995. Sophie has a physiotherapy practice and the two front rooms of the home are used exclusively by Sophie for her practice. Sophie and David live in the remainder of the home. If David had incurred interest on money borrowed to acquire the home, he could not deduct any of that interest under section 8-1 because it would not be incurred in gaining or producing his assessable income. Because David would not be entitled to any interest deduction, section 118-190 does not apply to reduce David's entitlement to a main residence exemption when a CGT event happens in relation to the dwelling.



This is another reason to buy properties in single names. For asset protection reasons it would be good for the main residence to be in the name of the one not running a business, for example. This would also be beneficial with CGT as a non-owner spouse running a business in the main residence would not result in CGT being incurred on the main residence.


However if you wanted to claim part of the interest on the loan and other costs you could still do this by leasing part of the property to your spouse or a related company. The rent received would be income, but this may allow negative gearing if the income is less than the rent. It would also allow the spouse or the company to claim the rent paid as a tax deduction. But this will only work in certain instances.


Example

Mr X is married to Dr Y. Mr X owns the house and Dr Y runs a medical practice from 2 rooms at the front of the house. The house could be CGT free for Mr X.

OR

Mr X could lease the 2 rooms to Dr Y at commercial rents. Dr Y can then use this to reduce his high income. Mr X could negative gear and Dr Y could also claim a deduction. Because Dr Y is on a much higher income his savings will be much more than Mr X’s savings from negative gearing. There is a net tax benefit across the family. But the down side is that the house will be subject to CGT when it is later sold.


See
TD 1999/71 Income tax: capital gains: does section 118-190 of the Income Tax Assessment Act 1997 reduce your main residence exemption if part of your dwelling is used by someone else for an income producing purpose? https://www.ato.gov.au/law/view/document?locid=txd/td199971/nat/ato

 

If the property was a pre-1985 property and also a PPOR, would you lose the CGT exempt status in this example of the property owner running an income producing business at home?

 

No