Most home business owners underestimate how early setup decisions affect tax obligations later, says H&R Block’s Mark Chapman. Learn which costly mistakes to avoid from the start.
For entrepreneurs and small business operators navigating the complexities of tax obligations in Australia, launching a home-based business can be an exciting and flexible way to build your own enterprise.
But alongside the creative and operational decisions, understanding your tax obligations from day one is crucial, not just to comply with the law, but to ensure you are claiming the deductions you are entitled to and planning strategically for growth.
H&R Block Australia’s Director of Tax Communications, Mark Chapman, says many new business owners underestimate how early decisions can affect their tax position later on. “Setting things up correctly from the beginning can save significant time, stress and money down the track,” Chapman says.
Here is a practical tax guide for new and aspiring home business owners.
1. Set Yourself Up Correctly
Before you start trading, make sure you have covered the essentials:
Choose the right business structure:
Will you operate as a sole trader, partnership, company or trust? This choice affects how you pay tax and what deductions you can claim.
Register for an ABN:
An Australian Business Number (ABN) is required for tax reporting and dealings with customers and suppliers.
Register your business name and tax registrations:
Depending on your turnover and activities, you may need to register for GST (if you expect to exceed the $75,000 threshold) and potentially for PAYG withholding if you have employees.
Set up record-keeping systems:
Organise a bookkeeping system or accounting software from the outset to track income and expenses accurately. Good records make tax time far less stressful and reduce the risk of errors.
According to H&R Block, poor record keeping is one of the most common mistakes made by first-time business owners.
2. Declare Your Income and Lodge on Time
All income your business earns is assessable and must be reported in your tax return. For sole traders, this is typically part of your personal tax return. Companies and trusts have separate reporting requirements.
If you are registered for GST, you will lodge a Business Activity Statement (BAS). This reports GST collected, PAYG instalments and other tax obligations.
Missing deadlines can incur penalties and interest, so staying organised throughout the year is essential.
3. Understanding Deductible Expenses
One of the major benefits of running a business from home is access to a range of tax deductions, but these must be claimed correctly.
You can generally claim deductions for expenses that relate directly to earning business income. These fall into two main categories.
Running expenses:
Costs associated with working from home such as electricity, phone and internet, stationery and depreciation on office equipment like computers and printers.
Occupancy expenses:
If you have a designated workspace that qualifies as a “place of business”, you may also claim a portion of mortgage interest or rent, council rates, land tax and home insurance based on the business use percentage.
H&R Block advises that deductions must only be claimed for the business portion of these costs. Personal use must be excluded.
4. Choose Your Calculation Method Wisely
The ATO allows different methods to calculate deductions for running costs incurred by a home business.
Actual cost method:
You calculate the portion of your real expenses that relate to business use.
Fixed rate method:
You can claim a set rate per hour worked from home, currently 70 cents per hour, which covers utilities and communication costs.
Each method has advantages depending on your circumstances and record-keeping. H&R Block recommends speaking with a registered tax agent to determine which approach is most suitable.
5. Don’t Overlook Capital Gains Tax
A common trap for home business owners is overlooking the capital gains tax implications.
If you use part of your home as a place of business and claim occupancy deductions, you may lose part of your main residence capital gains tax exemption when you sell the property.
Mark Chapman says this is often missed until it is too late.
“Planning ahead, including getting a valuation when you start using part of your home for business, can help manage potential future tax exposure,” he says.
6. Stay Compliant Throughout the Year
Good record keeping is not just helpful at tax time, it is required.
Keep receipts, invoices and records of hours worked from home for at least five years to support your claims.
If your business grows and you take on employees, you will also need to understand your obligations around PAYG withholding, superannuation contributions and potentially fringe benefits tax.
7. Seek Professional Advice
Tax rules change regularly, and how they apply can vary depending on your individual situation.
H&R Block says working with a registered tax agent who understands small business and home-based operations can help business owners avoid costly mistakes and stay compliant as their business grows.
Starting a home business can be one of the most rewarding ventures you undertake. With clear tax planning, strong systems and timely compliance, you can set yourself up not only to meet your obligations, but to build a sustainable and successful business.
With expert guidance from H&R Block, home business owners can make informed decisions and approach tax time with confidence rather than stress.
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