Great question — this distinction is critical when claiming deductions for a home-based business or renting part of your home, especially because it impacts your Capital Gains Tax (CGT) exemption in Australia.
🧾 The ATO distinguishes between:
| Type of Cost | Description | CGT Impact | Examples |
|---|---|---|---|
| Occupancy Costs | Related to owning or occupying the property | ✅ Triggers CGT liability if claimed | Mortgage interest, council rates, land tax, rent (if renting), home insurance |
| Running Costs | Related to using the property day-to-day for business or income purposes | ❌ Generally do not affect CGT if no exclusive use | Electricity, internet, phone, cleaning, office supplies, depreciation on equipment |
🏠 1. Occupancy Costs (Claiming = Loss of CGT Exemption)
These are costs of owning or renting the space.
The ATO says: If you claim occupancy costs, you are acknowledging part of your home is income-producing, so that part loses the CGT main residence exemption.
🧮 Examples:
- Mortgage interest
- Council rates
- Land tax
- Rent (if you’re a tenant)
- Building insurance
❗ Example:
If you claim 20% of your mortgage interest as a business deduction, then 20% of your home may become subject to CGT when you sell it.
🧹 2. Running Costs (Safer to Claim)
These are everyday operating expenses, like bills and consumables.
If you use a shared space (e.g. kitchen table, spare bedroom not used exclusively), and only claim running costs, you usually retain full CGT exemption.
🧮 Examples:
- Electricity
- Gas/heating
- Phone/internet
- Cleaning services
- Office equipment (e.g. chair, desk)
- Depreciation on computer, printer, etc.
🎯 Key CGT Rule:
Claiming occupancy costs = CGT applies (partially).
Only claiming running costs = CGT exemption usually preserved.
✅ Tips to Minimise CGT Impact:
| Strategy | Effect |
|---|---|
| Use shared rooms (not exclusive-use) | Helps retain CGT exemption |
| Only claim running costs | Avoids triggering CGT |
| Don’t claim depreciation on home itself | Avoids cost base adjustments |
| Keep accurate records of business use | Supports fair CGT calculation |
🧠 Summary
| Cost Type | Can You Deduct? | Does It Affect CGT? |
|---|---|---|
| Occupancy Costs | ✅ Yes | ✅ Yes (part CGT applies) |
| Running Costs | ✅ Yes | ❌ No (if no exclusive area) |