Operating a business from home, whether as a freelancer, sole trader, or small business owner can be convenient and cost-effective. However, recent clarification from the Australian Taxation Office (ATO) highlights that running a business from your home may have important capital gains tax (CGT) implications when the property is eventually sold.

The ATO has recently outlined its position on how home-based businesses interact with the small business CGT concessions, addressing a long-standing area of confusion for taxpayers.

 

The Key Issue: The Active Asset Test

In most cases, when individuals sell their main residence, they can claim a full CGT exemption. However, using part of the home for business purposes can reduce the scope of this exemption.

Where the full main residence exemption is not available, taxpayers may look to other CGT relief measures, such as:

• the 50% CGT discount for assets held longer than 12 months; or
• the small business CGT concessions, which can significantly reduce or even eliminate a capital gain if the relevant conditions are satisfied.

A key requirement for accessing the small business concessions is passing the active asset test.

Broadly speaking, this means the asset must have been actively used in carrying on a business for at least 7.5 years during the ownership period for asset owned more than 15 years, or for at least half of the time the asset was owned for asset less than 15 years ownership.

Importantly, the ATO emphasises that the active asset test applies to the whole property, not just the part used for business. An asset either qualifies as an active asset, or it does not, there is generally no concept of a “partially active” asset.

This means that simply having a home office, studio, workshop, or claiming home occupancy expenses will not automatically make your property an active asset. Where the business use is minor or incidental compared with the home’s primary residential purpose, the ATO’s view is that the small business CGT concessions will typically not apply.

Case Law Support: Rus v FCT

This interpretation is supported by case law, particularly the Administrative Appeals Tribunal decision in Rus and Commissioner of Taxation [2018] AATA 1854.

In this case, the taxpayer sought to apply the small business CGT concessions to the sale of a 16-hectare rural property. Only a small portion of the property, less than 10%, was used for business purposes, including a home office and a shed storing tools and equipment for a plastering and construction business.

The remainder of the land was used residentially or left vacant.

The Tribunal agreed with the ATO that the property did not satisfy the active asset test. The business use was considered too limited and not sufficiently integral to the property as a whole. Minor or incidental use of the property for business was not enough to classify the entire property as an active asset.

Practical Examples

To illustrate how the rules operate, consider the following scenarios.

Minor home-based business
Harriet runs a small hairdressing business from a spare room in her home, using around 7% of the property’s floor area and seeing clients several hours per week. She claims deductions for home occupancy expenses and receives a 93% main residence exemption when selling the property.

However, because the business use is relatively minor, the property does not qualify as an active asset. Harriet cannot access the small business CGT concessions, although the 50% CGT discount may still apply.

Substantial business use
Sue and Rob own a two-storey property where the ground floor operates as a takeaway shop, occupying about 50% of the total floor space, while the upper level is their private residence. The business has operated for many years with employees.

In this case, the property may satisfy the active asset test, meaning the owners could potentially access the small business CGT concessions for the portion of the gain not already covered by the main residence exemption.

Practical Considerations for Homeowners

If you run a business from home, it is important to understand the potential tax consequences:

• A partial main residence exemption does not automatically mean access to the small business CGT concessions. Many taxpayers assume that claiming home-office deductions is enough—but the ATO does not generally take this view.
• Think carefully before changing how your home is used. Operating a business from home can affect deductions, future CGT calculations, and eligibility for tax concessions.
• Maintain good records. Floor plans, business usage details, and evidence of deductions can help support your tax position and assist with future planning or ATO reviews.

If you are planning to sell your property, it is important to assess potential CGT exposure and determine which concessions may apply.