How to Arrange a Partial or Full Tax Deduction On Your Home Mortgage by; Establishing, Reinventing or Relocating Your Business to Run at Your Existing or Future Home.
In so doing, you can live in a better house, within a better area at a lower cost (unless you love your home and would prefer to add on a tax-subsidised extension to make it large enough in which to live and work).
This is a specialised area combining business and tax planning, wealth creation and lifestyle enhancement and to sum it up we call it a ‘Home Business Strategy’ which more business owners are taking advantage of.
Capital Gains Tax (CGT):
If you run a business at or from home, you are most likely liable to pay CGT upon a future profitable sale or other form of taxable disposal such as a transfer to family (even at or below market value).
With a home business strategy however, this is not necessarily the case.
A capital gain or capital loss is the difference between the acquisition and disposal price of a CGT asset.
It forms part of your assessable income for income tax purposes, so it’s not a separate tax.
To claim a deduction for your home’s mortgage interest, council and water rates and building insurance, you must pass the ATO’s ‘interest deductibility test’, which means you must have an area set aside as a place of business which very much looks and feels as such and can’t be easily used or converted for private purposes.
This also means though, that CGT is applicable upon future profitable sale.
Interestingly, your home is still considered a CGT asset even if you pass the test (even unwittingly) and you don’t claim the deductions as mentioned above.
Let’s start by differentiating between running a business ‘at’ or ‘from’ home:
‘At’: You perform your work in a dedicated workshop, studio, medical suite or office set up at your home where customers visit you e.g. you are a dressmaker, piano teacher, tutor, or other home-based professional such as a physiotherapist, accountant or lawyer.
‘From’: You have a home office but clients do not come to visit you - typically you travel to other people’s homes and offices, or you are on the road for work e.g. you are a mobile mechanic, electrical contractor, bricklayer, mortgage broker, sales professional, business and or mobile IT services consultant, dog washer, removalist, cleaner.
Most business owners can work at or from home if they wanted to, or to even start a new business as sort of 'division’ of what they do at their commercial premises, at home or to even start something completly different as there are no legal limits on how many businesses you can run.
Running a home business:
By not having separate commercial premises, you'll save doubling up on rates, mortgage interest(or rent), building insurance, maintenance and utilities thus to conserve, thousands of dollars per annum.
Sadly though, if your adviser’s experience falls outside this field of expertise, you may well have been told that setting up a business in your home just isn’t worth the associated future CGT payable upon disposal, and so you’ve let it go.
Alternatively, this conversation might have never happened as many of the business strategies that can greatly improve your lifestyle and finances aren’t taught in accountancy, taxation, financial planning or legal courses nor by any professional associations to their members.
If you're already foregoing claiming thousands if not tens of thousands of dollars every year in allowable deductions on your home, you might want to consider how this adds up over the years.
Alternatively, you could make extra repayments off your home mortgage to potentially save hundreds of thousands in bank interest.
Using tax savings to reduce the interest of your home loan:
Example 1: A $400,000 principle and interest loan over 25 years @ 5.5% interest:
Monthly Repayment $2,456.35
Total interest paid $336,905.00
Compared to having a home business strategy that saves you $500 per month in tax that you pay into your home:
Loan term reduces to 17 years 8 months
Total interest paid reduces to $225,771.57
= You're mortgage free 7 years 4 months faster and you save $111,204.00.
Sure beats super!
Opposed to investing into any form of superannuation fund (retail, industry, government or self-managed super fund), a home business strategy incurs no earnings tax, contribution tax, early access tax or the fees associated with the annual audit.
Further considering that pensions and lump sums drawn from super funds by those over the age of 60 are tax free, depending on your circumstances, up to $500,000 from the proceeds of your home business strategy can be contributed tax free into super to give your retirement income a further massive boost.
Preferable to having a great self-managed super fund (SMSF) and despite the rapid and massive growth of the sector, a home business strategy circumvents an entire environment in which SMSF trustees face ongoing compliance obligations and risk severe repercussions for non-conformity by the ATO.
Also you might not have considered that if your SMSF contains property that appreciates in value, you can’t borrow against that new found equity to create more wealth, which thankfully is not the case when it comes to a home business property.
Having said this, we still advocate the use of super and in particular SMSFs where applicable to personal circumstances.
Simply put though, we are of the view that businesses in general receive preferential treatment from the tax system and a home business can take that to the next level.
Relocating your existing business to home:
This can present massive savings on operating costs.
A $300,000 mortgage on your business premises at 5% p.a. interest costs you $15,000 p.a. whereas you could instead funnel this same $15,000 into the business side of your home mortgage to pay it off faster from earnings that have never been and will never be taxed.
Over and above, you’ll save on the cost of utilities, rates, maintenance and repairs, and the list goes on.
You can also claim building depreciation write-downs to the extent your home is used for business.
Converting and consolidating your debt:
As another savings stragety, you can immediately wipe-out or seriously reduce your non tax-deductible personal debts.
e.g. personal loans and credit cards, by consolidating them into your home loan as part of your home business strategy.
With the average Australian home mortgage being around $350,000 and an average 30% marginal tax rate payable amongst us all, this can further land you on average of a $100,000 cash windfall to spend as you please.
Upgrading with a home business strategy:
You might consider upgrading your home into any new or established home you like, with no location restrictions and for less net cost with a home business strategy than doing so any other way.
Generally relocating your business to your home is fine unless your business is not permitted by council in a residential area due to loud noise, noxious fumes, heavy traffic, large bulldozers and the like.
Coordination is key:
Much like a registered builder coordinates a project, implementing a home business strategy which may include a substantial home addition, moving home altogether and or relocating your business to your home, requires a holistic understanding and integration of the following areas:
• Business - planning, creation, management, mentoring, selling, restructuring and redevelopment
• Financial planning (mainly insurance and superannuation)
• Tax planning, business structure and taxpayer compliance
• Accounting and bookkeeping
• Property - selection, buying, retaining, development, improvement, maintenance and or selling
• Legal advice and solutions
• Mortgage finance
• Local council – guidance on home business applications
Other features and benefits of a home business strategy:
1. You can offset you PAYG income from another job in potentially claim new deductions from your home business of up to $250,000 per annum as sole trader or $500,000 per annum in a partnership (typically a husband and wife), to offset your PAYG income from another job.
2. Unlike sole traders and partnerships, with an incorporated home business i.e. (Pty Ltd’s), you can claim unlimited deductions providing these can be substantiated.
3. You can purchase a home for the tendered lawns and gardens, the exquisite bathrooms, gourmet kitchen and the designer swimming pool, never use these amenities for business and still get massive overall yearly tax deductions!
4. With a home business strategy your new home can include all the features you love, such as tendered lawns and gardens, exquisite bathrooms, gourmet kitchen, wonderful alfresco, designer swimming pool (the list goes on), and whilst you may likely never use these amenities for business, you can still get legally sound, massive overall annual tax deductions.
A well-planned, properly executed and monitored home business strategy is undoubtedly the least expensive way to own a home and run a business, regardless of what it is, where it is, how much it’s worth and whether or not you owe any money on it.
A great home business strategy allows you to achieve savings from the lowest of possible business operating costs as coupled with shiny new tax savings as having arisen from the re-characterisation of existing personal expenses into business expenses.
Next, it’s your bedrock for channelling this money that is seemingly from “thin air”, into whatever additional personal and or business expenditure and or wealth creation opportunities interest you, meantime of course as you enjoy a what can be a significantly higher standard of living.
Absolutely nothing compares to your new integrated, enhanced, wealth creation plan, dream home and overall lifestyle.