But there is an important tax consideration many people overlook. If you run a business from your home, it may affect the capital gains tax (CGT) treatment when you eventually sell the property. Recent guidance from the Australian Taxation Office (ATO) highlights how these rules apply and clears up some common misunderstandings.
The main residence exemption
Normally, when you sell your main residence you may qualify for a full exemption from capital gains tax. This is one of the most valuable tax concessions available to Australian homeowners.
However, the situation can change if part of your home has been used for business purposes. In some cases, this means you may only qualify for a partial main residence exemption rather than a full one.
If a full exemption is not available, other CGT concessions may still apply. These can include the CGT discount for assets held longer than 12 months or the small business CGT concessions, depending on the circumstances.
Understanding the “Active Asset” test
One key requirement for accessing the small business CGT concessions is something called the active asset test.
In simple terms, this test looks at whether the property has been actively used in a business for a sufficient period of time.
Generally, a property must be used in a business for either:
- At least 7.5 years during the ownership period, or
- Half of the time you owned the property.
Importantly, the ATO applies this test to the entire property, not just the part used for business. A property either qualifies as an active asset or it does not.
Simply having a home office or claiming some home-based deductions does not automatically make your home an active business asset. If the business use is minor compared to the residential use, the small business CGT concessions will generally not apply.
A case that highlights the rules
A tax case known as Rus v Commissioner of Taxation illustrates how strictly these rules can be applied.
In this case, the taxpayer used a small portion of a large rural property for business activities including a home office and equipment storage. However, most of the property remained residential or unused.
The tribunal ruled that the property as a whole did not qualify as an active asset, meaning the taxpayer could not access the small business CGT concessions.
This decision reinforces the ATO’s position that minor or incidental business use is usually not enough.
Real-world examples
Example 1: Minor business use
Harriet runs a small hairdressing business from a spare room in her home. The business uses around 7 percent of the property’s floor space and operates for about eight hours per week.
She can claim a 93 percent main residence exemption when selling the property. However, because the business use is limited, she would not qualify for the small business CGT concessions, although the standard 50 percent CGT discount could still apply.
Example 2: Significant business use
Sue and Rob own a two-storey building. The ground floor operates as a takeaway store while the top floor is their home.
Because a significant portion of the property is used for business activities, the property may qualify as an active asset, potentially allowing them to access the small business CGT concessions for the part of the gain not covered by the main residence exemption.
What this means for home-based business owners
If you operate a business from home, it is important not to assume you will automatically qualify for CGT concessions.
The ATO makes it clear that:
- Claiming home-based deductions does not automatically qualify your home as a business asset
- A partial main residence exemption does not guarantee access to small business CGT concessions
- The level of business use matters when assessing eligibility.
A few practical tips
If you run a business from home, consider the following:
Seek advice before changing how your home is used
Starting or expanding a home-based business can affect your tax position later.
Keep good records
Floor plans, hours of business activity and detailed deductions may help support your position.
Plan ahead if selling is likely
Professional advice can help you understand potential CGT exposure and available concessions.
The bottom line
Many home-based business owners assume that operating a business from home automatically provides access to small business CGT concessions. The ATO’s guidance shows this is often not the case.
Understanding how your home’s business use is treated can help you make smarter financial decisions and avoid surprises when it comes time to sell your property.
If you run a business from home or are planning to sell your property, it may be worth having a conversation with someone who can help you understand how the rules apply to your situation.
👉 Learn more or speak with the team at Lead Advisory Group.
