CGT and Your Home: New ATO Guidance for Home-Based Businesses |
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| Running a business from home can be convenient and cost-effective. However, new guidance from the Australian Taxation Office (ATO) highlights an important issue for homeowners who operate a business from their property.
Main Residence Exemption vs Business Use In most cases, when you sell your main residence, you may be eligible for a full capital gains tax (CGT) exemption. However, if part of your home is used for business purposes, the exemption may be reduced. Where the full exemption does not apply, other concessions may be available, including the 50% CGT discount or the small business CGT concessions. These concessions can significantly reduce or even eliminate a capital gain, but strict eligibility conditions apply. See: Home-based business and CGT implications | Australian Taxation Office |
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The Key Issue: The Active Asset Test |
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| When an individual sells their main residence, they will usually qualify for a full CGT exemption. However, if part of the property has been used for business purposes, the exemption may be reduced.
Where the full main residence exemption does not apply, other CGT concessions may be available. These can include the 50% CGT discount for assets held longer than 12 months or the small business CGT concessions. The small business CGT concessions can significantly reduce or even eliminate a capital gain on the sale of a property, but only if certain eligibility criteria are met. One of the most important requirements is that the asset must pass the active asset test. Broadly speaking, to meet this test the property must have been actively used in a business for at least 7.5 years during the ownership period, or for at least half of the time it was owned. Importantly, the ATO emphasises that the active asset test applies to the entire property, not just the part used for business. In other words, an asset either qualifies as an active asset or it does not—it cannot partially satisfy the test. Simply having a home office, workshop, or claiming occupancy expenses as a tax deduction does not automatically make the property an active asset. If the business use is only incidental compared with the property’s primary residential purpose, the ATO’s view is that the small business CGT concessions will generally not apply. |
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What the Courts Say |
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| The requirement that the entire property must qualify as an active asset is supported by case law, particularly the Administrative Appeals Tribunal decision in Rus and Commissioner of Taxation [2018].
In that case, the taxpayer attempted to access the small business CGT concessions when selling a 16-hectare rural property. Only a small portion of the land—less than 10%—was used for business purposes, including a home office and a shed used to store tools, equipment, and vehicles for a plastering and construction business run through a controlled company. The remainder of the property was either vacant or used for residential purposes. The Tribunal supported the ATO’s position that the property as a whole did not satisfy the active asset test. It concluded that the business activities were not sufficiently connected to the property overall. Minor or incidental business use was not enough to classify the entire property as an active asset, particularly because the core business activities were largely conducted off-site. This decision reinforces the ATO’s strict approach when assessing home-based businesses. The property is considered as a whole, and limited business use will generally not qualify for the concessions. |
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Examples |
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| The following examples illustrate how the ATO may apply these principles in practice.
Minor home-based business: Angela runs a small hairdressing business from a spare room in her home. The business occupies around 10% of the property’s floor area, and she sees clients for approximately eight hours per week. Harriet claims deductions for occupancy expenses and receives a 90% main residence exemption when the property is sold. However, because the business use is relatively minor, the property does not qualify as an active asset. As a result, the small business CGT concessions are not available, although the 50% CGT discount may still apply. Significant business use: Lily and Bob own a two-storey building where the ground floor operates as a takeaway shop, representing about 65% of the property’s total floor area. The upper floor is used as their private residence. The business has operated from the premises for many years and employs staff. In this situation, the property may qualify as an active asset. This could allow Lily and Bob to access the small business CGT concessions for the portion of the capital gain not covered by the main residence exemption. |
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Key Takeaways |
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Need Advice? |
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| If you operate a business from home or are planning to sell your property, it’s important to understand the potential CGT implications. Speaking with your accountant can help ensure you make informed decisions and avoid unexpected tax outcomes. | ||
