Running a business from home—or simply working from the spare room—is the "new normal" for many in small businesses Australia. But at Hillier's Advisors, we’ve seen a common misunderstanding that can lead to a massive tax bill years down the line. While claiming Work from Home tax deductions is a great way to reduce your current taxable income, the way you use your home determines whether you keep your CGT (Capital Gains Tax) exemption.
If you use your home for income-producing purposes, the ATO allows you to claim a portion of your home living expenses. However, there is a distinct line between a "Home Office" and a "Place of Business," and crossing that line changes your tax obligations forever.
The first step in any strategy is understanding how the ATO classifies your activity. Not all "working from home" is equal. The ATO generally splits users into two camps:
For the 2026 financial year, the ATO has maintained specific methods for claiming expenses. Understanding these is the key to maximizing your Work from Home tax deductions without triggering an audit.
If you use your home as a home office, you have two choices:
If you use part of your home as a place of business, your claims expand. You calculate the portion of the property occupied by the business (usually by floor area) and can claim that percentage of all costs. This includes occupancy expenses in addition to the running expenses mentioned above—meaning you can claim a portion of your mortgage interest or rent, council rates, and insurance.
One of the most dangerous "traps" for small business owners is the claim for occupancy expenses. While these can significantly boost your Work from Home tax deductions, they come with a heavy CGT price tag.
If your home is used as a place of business, then on the sale of your home, the business percentage will also attract CGT. It is important to note that these CGT consequences are not avoided simply by choosing not to claim the expense on your yearly return. What is relevant to the ATO is how the space is actually used. If the garage is a dedicated workshop, it is a business asset, regardless of whether you claimed the mortgage interest or not.
To help you visualize the impact on your CGT and annual return, refer to the following comparison table adapted from current ATO guidelines:
When you use your home as a place of business, the ATO uses a "pro-rata" approach to CGT. This is usually based on the floor area percentage of the business space and the length of time it was used for business.
However, there is a "Market Value" rule that is often overlooked. If you bought your home in 2015 but only started your home business in 2022, the ATO considers your "cost base" for CGT purposes to be the market value of the home on the day you first used it for business. At Hillier's Advisors, we recommend getting a formal valuation at this start date to ensure you aren't paying tax on the capital growth that happened while the house was strictly a private residence.
While the CGT consequences sound daunting, there are concessions available. If your home qualifies as an "Active Asset" under ATO rules, you may be eligible for Small Business CGT Concessions. These can potentially reduce the taxable gain by 50% or more, or even allow you to roll the gain into a superannuation fund under the retirement exemption.
The "6-year rule" is another powerful tool, though its application to home-based businesses is complex. Navigating these requires a professional touch to ensure you don't inadvertently trigger a tax event that costs you tens of thousands of dollars in equity.
Whether you are claiming 70c an hour for Work from Home tax deductions or managing a complex CGT (Capital Gains Tax) cost base, your best defense is documentation. The ATO increasingly uses data matching to find discrepancies. You must keep:
Navigating the intersection of Work from Home tax deductions and CGT requires a proactive strategy. The decisions you make in your tax return this year can have a massive impact on the wealth you realize when you sell your home a decade from now.
Are you unsure if your current setup is "safe" from a future CGT bill? Contact Hillier's Advisors today for a comprehensive tax review and ensure your strategy is ATO-compliant.
Since 1989 Hillier’s Advisors have been delivering financial services to individuals, businesses and business owners across Newcastle and the wider Hunter Region. A major focus for the Hillier’s Advisors team and the work we do is providing the right financial advice when our clients need it, not just when they ask for it.
