Running a business from home can be practical and cost-effective. Whether you are a sole trader, freelancer, or small business owner, it offers flexibility and lower overheads. But when it comes time to sell your home, the tax implications are not always as straightforward as many expect.
Recent ATO guidance has clarified how capital gains tax (CGT) applies to home-based businesses and for many, it challenges long-held assumptions.
The Common Assumption - And Where It Falls Short
Many business owners believe that if they use part of their home for business, they can access small business CGT concessions when they sell. It seems logical. If you are claiming deductions and running a business from home, surely that part of the property counts as a business asset? But the ATO’s position is more restrictive. In many cases, simply working from home or claiming occupancy expenses is not enough to qualify.
Understanding the Main Residence Exemption
Your primary residence is generally exempt from CGT when you sell. However, if part of your home is used to generate income, that exemption may be reduced.
For example:
- A home office
- A studio or consulting room
- A workshop or storage space
In these cases, you may only receive a partial exemption based on how much of the home was used for business purposes. From there, many business owners look to other concessions to reduce the remaining tax, particularly the small business CGT concessions. This is where things become more complex.
The Active Asset Test - The Critical Requirement
To access small business CGT concessions, one key requirement is the active asset test. Broadly, this means the asset must be actively used in a business for:
- At least 7.5 years, or
- At least half of the ownership period
But the key point many miss is this:
- The test applies to the entire property - not just the business portion.
- The property either qualifies as an active asset, or it does not.
- There is no partial pass.
- This is where most home-based business setups fall short.
Why a Home Office Is Usually Not Enough
If your business use is minor or incidental compared to the residential use of the property, the ATO is unlikely to treat the home as an active asset. This means:
- A home office
- Occasional client visits
- Storage of tools or equipment
…will generally not qualify the entire property for CGT concessions.
Even if you have been claiming deductions for years, this does not automatically support access to small business CGT relief.
What the Courts Say - Rus v FCT
This position is supported by case law, including the Rus v FCT decision. In this case, only a small portion of a large property was used for business purposes. The rest remained residential or unused. The tribunal found that:
- The business use was not significant enough
- The property as a whole was not an active asset
As a result, the taxpayer could not access the small business CGT concessions. The takeaway is clear - the ATO looks at the property holistically, not just the business portion.
Practical Examples
Minor Business Use
Jane runs a small salon from a spare room, using around 7% of her home. She claims deductions and receives a partial main residence exemption when she sells. However, because the business use is limited, the property does not qualify as an active asset. She cannot access small business CGT concessions, although the 50% CGT discount may still apply.
Significant Business Use
Susan and Ben operate a takeaway business from the ground floor of their property, which makes up 50% of the building. The business has been running for years with employees and consistent activity. In this case, the property is more likely to qualify as an active asset. This may allow access to small business CGT concessions on the taxable portion of the gain.
What This Means for Business Owners
There are a few important takeaways.
- Do not assume business use equals CGT concessions
Claiming deductions or running a business from home does not automatically qualify your property. - Understand the long-term impact
Decisions made today - such as claiming occupancy expenses - can affect your CGT position years down the track. - Plan before making changes
Starting or expanding a home-based business should involve considering both short-term tax benefits and long-term outcomes. - Keep clear records
Floor plans, usage percentages, and financial records all play a role in supporting your position.
The Bigger Picture - Tax, Cash Flow and Strategy
CGT is not just a one-off event at the point of sale. It is the result of decisions made over time. This is where many business owners benefit from stepping back and looking at the bigger picture. Understanding how your business structure, cash flow, and tax position work together can help you avoid unintended outcomes later.
Support from experienced small business accountants can help you navigate these decisions with more clarity.
For more complex scenarios, such as structuring, asset use, and long-term planning, working through business advisory services can help align your decisions with your broader goals.
The Bottom Line
The ATO’s updated guidance makes one thing clear - many home-based business owners will not qualify for small business CGT concessions when selling their home. That does not mean opportunities do not exist. But it does mean assumptions can be costly.
The key is to plan early, understand the rules, and make informed decisions based on your situation. If selling your home is on the horizon, or you are currently running a business from home, it is worth reviewing your position now rather than later. Contact Trekk Advisory to explore your options and make sure your decisions today support your financial outcome tomorrow.
