Elevated Capital Gains Tax Risk When Selling Your Home if it has been used for Business Purposes and potential use of the Small Business Concessions

Written by Daniel Dubois

At Salt Financial Group, we are committed to ensuring that our clients are well-informed about changes to various risks in their future tax obligations.  An area seeing increasing attention from the Australian Taxation Office (ATO) is the potential for Capital Gains Tax (CGT) to apply when selling your home – particularly when that property has been used for the running of a business.

It’s not all bad though, as you may also be able to utilise the Small Business Concessions and turn this situation to your advantage.

We note below the important considerations:

How the ATO Looks at Property Use and CGT

The ATO has established guidelines for properties that are used for both personal and business purposes. This includes situations where a portion of your home has been used as a place of business – for example, a home office or any space that has been rented out.

While the main residence exemption from CGT generally applies when selling your home, this exemption can be compromised if part of your home has been used for business purposes. Even if it’s a small part of the home, the tax office may still assess CGT on that portion when you sell.

What Does This Mean for You?

If you’ve ever used part of your home for business purposes, you could be impacted by CGT in the following ways:

  • Portion of the Home Subject to CGT: The ATO can calculate the assessable capital gain based on the portion of the home used for business. For instance, if you’ve used a certain percentage of the floor area of your home for business, that portion may be subject to CGT.

  • Up to Six Years of Main Residence Exemption: If you moved out of your home and rented it out, you can still apply the main residence exemption for up to six years. However, this rule does not apply if you’ve used the property for business and claimed business deductions.

  • Deductions Affect CGT: If you've claimed deductions for business-related expenses (such as mortgage interest, utility bills, or council rates) for a portion of your home, you may not be able to claim the full CGT exemption when you sell.

  • Potential Impact upon Employees Working from Home The ATO treats the portion of the home used for work as potentially subject to CGT if the home office area has been used regularly and exclusively for business purposes. However, if the area is only used occasionally for work (e.g., a few hours a week), the risk of CGT is currently lower, and the ATO’s guidance is that infrequent .  With many clients now working from home on a regular basis, this has the potential for further changes in the ATO’s interpretation of existing rules in the future.

The Risks Are Real – Take Action Now

With CGT potentially applying to a portion of your home, it’s important to be aware of the implications and take proactive steps. This could impact the proceeds you retain from the sale of your property, and it’s crucial that you understand how your tax liability might change.

What You Should Do

  • Review Your Property’s Use: If you have used part of your home for business, now is the time to evaluate how much of your home has been dedicated to business purposes. This is crucial for determining how much of the capital gain may be subject to tax, with the tax exposures an important aspect of planning any future change of residence.  You may consider from a new perspective the address your business trades from.

  • Consult with a Tax Advisor: Before selling, it’s a good idea to consult with a tax professional. They can help you assess whether CGT is likely to apply to your property and assist in structuring the sale to minimise your tax liability.

  • Keep Accurate Records: It’s essential to keep detailed records of your property’s use, including any claims for business-related expenses. These records will be invaluable if the ATO questions your CGT liability.

  • Seek Advice on Tax Management Strategies: Depending on your circumstances, there may be strategies available to manage the impact of CGT.  It’s worth getting advice to ensure to ensure you are taking full advantage of available strategic opportunities.

Potential application of the Small Business Concessions (SBC)

Where the prime residence exemption doesn't fully apply to the sale of your home where it has been used for your small business, the Small Business Concessions may be of significant use. For instance, if part of the property was used for business purposes, you may qualify for the 50% active asset reduction, which allows you to reduce the capital gain by 50%. Going further, the retirement exemption can also apply if you meet certain conditions, potentially allowing you to contribute up to $500,000 into Superannuation beyond the normal deductible limits, and disregard assessable gains up to that value.

However, it's crucial to note that these concessions are only available to individuals running a small business who satisfy the SBC eligibility provisions. Additionally, the business use of the property must be significant enough to warrant the application of these concessions, and any concessions applied must align with how the property was used during the ownership period.

Be Aware of your options now

The ATO is becoming increasingly vigilant about CGT on properties that have been used for both personal and business purposes. If you are in this situation, you may face an elevated risk of having to pay CGT when selling your home. This may also present opportunities to improve your financial situation.  At Salt Financial Group, we urge you to take action now by reviewing your situation, keeping thorough records, and seeking expert advice to avoid unexpected tax consequences.

For any questions or concerns, don’t hesitate to get in touch with our team. We’re here to help guide you through your tax obligations and ensure that you make informed decisions when it comes to your property.

Jenni Anderson