This week’s blog shows how you can arrange a partial or full tax-deduction on your home mortgage by establishing, reinventing or relocating your business to run at or from your existing or future home.
Did you know you can legally use your home to significantly minimise both your mortgage and the tax payable on your business income?
In doing so, 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 to live in and work from).
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 CTG is applicable upon future profitable sale. Interestingly, your home is still considered a CTG asset even if you pass the test (even unwittingly) and you don’t claim the deductions as mentioned above.
The skill is in properly breaking down and applying a number of rules to your circumstances to ensure you trigger a large CGT assessable capital gain however also knowing how to plan and manage your circumstances to legally reduce the amount payable likely to nil.
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 ‘division’ of what they do at their commercial premises, at home or to even start something new as there are no legal limits on how many businesses you can run.
Running a home business
By not having separate commercial premises, you will save doubling up on rates, mortgage interest (or rent), building insurance and maintenance and utilities 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 are 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.
Furthermore, consider the substantial wealth you could create if these tax savings were reinvested either back into your business or elsewhere.
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
Ex 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 are 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.
You might have also not 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 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 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 where 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 and relocating your business to your home requires a holistic understanding and integration of the following areas:
• Business - planning, creation, management, mentoring, selling, restructuring & redevelopment
• Financial planning (mainly insurance and superannuation)
• Tax planning, business structure and taxpayer compliance
• Accounting and bookkeeping
• Property - selection, buying, retaining, development, improvement, maintenance & or selling
• Legal advice and solutions
• Mortgage finance
• Local council – guidance on home business applications
Other features & benefits of a home business strategy:
1. You can 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 without using them for business, and you will still have access to significant yearly 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 home business strategy is a bedrock that allows you to channel the savings from low business operating costs as coupled with new tax savings, into whatever additional personal and or business wealth creation opportunities interest you have while enjoying a higher standard of living.
It is a path to your dream home and lifestyle.
About The Author
Frank Genovesi owns and operates ‘Intellisolve’, a Bartercard friendly accounting, financial planning, taxation, property, SMSF and business strategic advisory in Bibra Lake, WA. Frank’s company created the strategies espoused herein to has used it himself for over a decade. Of note, Former Federal Treasurer Swan liaised with former ATO Commissioner D’Ascenzio to facilitate passage of these strategies under the ATO’s private ruling system.
Additionally, he submitted approximately 400 pages of detailed research and findings as his company’s declared intellectual property to the Commonwealth Department of Finance, the ATO, ASIC and The Tax Practitioners Board for purposes of evaluation for public and practitioner consumption and no assertions or findings have ever been refuted.
Client intake for Intellisolve on Bartercard is currently open, so please feel free to make contact for a no obligation initial assessment of how a home business strategy could work for you. Alternatively you may ask your taxation adviser to contact us to apply for the requisite training in order to deliver you with effective and compliant advice.
W: www.intellisolve.com.au E: firstname.lastname@example.org M: 0410 283 211
General Advice Warning & Disclaimer: This article is general in nature only and does not take into account your personal situation, needs and objectives.
Before acting upon anything contained herein, you should consult Intellisolve for an assessment of your prospects. Intellisolve is Corporate Authorised Representative number 288893 of CHPW Financial Pty Ltd, AFSL No. 280201 whom each expressly disclaim any and all liability for any loss or damage you may sustain from having acted contrary to this notification.
Visit mybc.bartercard.com to discover businesses you can do business with this year.
Author: Frank Genovesi