What working from home expenses can you claim?

The ATO continues to be concerned about the validity of tax deductions being claimed by individuals and work-related expenses (including home office expenses) are an ongoing focal point. While the ATO acknowledges that in recent years there has been a rising trend for working from home, with technology leading to greater flexibility in being able to do so, they have also said they believe that some taxpayers are “either over-claiming or claiming private costs.”

A lot of the problem seems to be lack of understanding or not excluding private usage components from expenses claimed as a deduction. For example, in the past claims have been submitted where the entire individual cost of internet or mobile phones is entered, rather than just the portion of those costs that directly relates to working from home. To put the ATO concerns about this in context: where allowed to go on, it means a taxpayer has their personal household costs subsidised by other taxpayers, at the expense of the government funding items for the benefit of the broader population.

Lack of proper records is also an issue. You need to be able to prove you incurred an expense and how your claim was calculated. The ATO may disallow “claims where the taxpayer hasn’t kept records to prove that they legitimately incurred the expense and that the expense was related to their work.”

Here are some examples of the types of claims the ATO is concerned about:

    1. A school principal claimed a deduction of $2,400 relating to electricity and phone expenses incurred when working from home. Although she had a letter from the school confirming she was required to complete work from home, she was unable to show how the claim had been calculated. The principal voluntarily chose to reduce her claim by 70%.
    2. An advertising manager completed irregular work from home to fit in overseas clients in different time zones. She tried to claim the rent of her home as a tax deduction – this was rejected by the ATO.

Now, many Australians have transitioned to working from home, at least temporarily, due to the coronavirus pandemic. So it’s a good time to review the rules on what working from home expenses you can claim and the methods for calculating your claim.

So what can you claim?

What working from home expenses you can claim is determined by both the type of working from home setup you have and also by the method you are using to make the claim. Currently there is also a ‘shortcut’ method available that makes it simpler to claim working from home expenses during the coronavirus pandemic.

For work you do on your laptop when sitting at the dining room table or on the couch (or otherwise not in a designated work area or home office) you can claim the following, in proportion to the cost that is directly related to the work you do from home:

    1. Phone calls/charges
    2. Internet usage
    3. The decline in the value of your computer.

Up to $50 can be claimed for phone and internet costs (unless you are a casual worker) without substantiation but you still need to be able to show how you have worked out you are entitled to this.

If you have a designated work area or home office, you can add to the above list and also claim the following (again, in proportion to the cost that is directly related to the work you do from home):

    1. ‘Running expenses’ – lighting, cleaning, heating, cooling
    2. The decline in value of your office equipment (if the cost was over $300).

If you run a business from home, all the above applies plus you can claim a percentage of ‘occupancy expenses’ which are things like:

    1. Rent or interest on your home loan
    2. Property insurance
    3. Land taxes/rates.

To claim ‘occupancy expenses’ your home must be your ‘place of business’ and you must have no other work location.

To calculate the percentage that you can claim you multiply your total occupancy expenses by the percentage of floor area occupied by your work area by the percentage of the year that you used this area exclusively for work purposes.

A note of caution: claiming occupancy expenses will generally impact the tax-free main residence exemption for Capital Gains Tax (CGT) purposes. This means that if you sell your property, CGT may be applied on the value attributed to the portion of your home used for business purposes. If you are considering making your home your place of business please give us a call on 03 5339 3200 to discuss the implications this may have for you. In some cases you will need a valuation of your home performed.

If you run a business from home and it is operated through a company or trust, it is recommended to have a rental agreement set up between the property owner and the business entity. The property owner can then report the rental income they receive and claim a reasonable portion of the related expenses against that income. The business entity can claim a deduction for the rent being paid.

Calculating your claim

Normally there are only two methods you can use to work out your claim for ‘running expenses’:

    1. The fixed rate method
      You record the actual amount of time you are working from home, or keep a log book for four weeks (which providing your work patterns don’t change over the year is then used as a basis for your full year expenses). You then claim based on a fixed rate of 52 cents (for the 2020-21 year) per hour worked from home in the financial year.
    2. The actual cost method
      You claim the actual expense. This is worked out by multiplying your total running expenses for the year by the percentage of floor area occupied by your work area by the percentage of the year that you used this area exclusively for work purposes.

Both the fixed rate and the actual cost methods are just looking at your ‘running expenses’. Where you have incurred the following costs, these still need to be claimed separately based on actual cost:

    1. Phone calls/charges
    2. Internet usage
    3. Consumables for your computer – e.g. ink
    4. Stationery
    5. The decline in the value of your computer, phone, or other equipment.
What is the shortcut method?

The shortcut method is a special arrangement aimed at making it simpler for individuals to claim working from home expenses incurred as a result of working from home during the coronavirus pandemic. Eligible individuals can claim a flat rate per hour worked from home as follows:

    1. 80 cents per hour worked from home between 1 March 2020 and 30 June 2020 inclusive – claim in the 2019-20 tax return.
    2. 80 cents per hour worked from home between 1 July 2020 and 30 June 2021 inclusive – claim in the 2020-21 tax return.

The fixed rate of 80 cents per hour is calculated to cover all working from home expenses for a particular period. You cannot have a further working from home expenses claim for the same period you are making a claim under the shortcut method.

To be eligible to use the shortcut method, you must have:

    1. Been genuinely working from home to complete your employment duties – doing more than just checking emails occasionally, or making the odd call, and
    2. Actually incurred some additional deductible expenses (such as electricity, gas, cleaning, phone, internet, stationery) as a direct result of working from home. You don’t have to have expenses in all these areas to be able to claim but you must have some.

Eligibility for the shortcut method is not tied to whether you have a dedicated work area or not.

To make a claim using the shortcut method (assuming you meet the eligibility criteria above), you need a record of the hours you have worked from home. This record could be actual timesheets or rosters, or a diary or other document that shows the hours that you worked.

Some notes about the shortcut method:

    1. The flat rate of 80 cents per hour is per individual and is not tied to a household. It doesn’t matter if you had multiple persons working from home. Providing each meets the eligibility criteria for the shortcut method, they can claim at the rate of 80 cents per hour.
    2. Using the shortcut method is optional. For some, such as those who have a dedicated home office, or normally work from home, it may be more favourable to claim using the general methods available. The shortcut method is designed to support individuals who do not normally work from home.
In summary

Remember, working from home expense claims should only be made for things you paid for (and were not reimbursed for) and only to the extent that the costs related to your work. Claiming a straight 100% of your costs when you are not running a business from home will attract ATO attention and they are prepared to contact your employer to check up if you do work from home and if so, how much work you do from home.

If you are unsure about what working from home expenses you can claim on your individual tax return, please call us on 03 5339 3200 or contact us here.

Thanks for reading.

The information contained on this website has been provided as general advice only. The contents have been prepared without taking account of your personal objectives, financial situation or needs. You should, before you make any decision regarding any information, strategies or products mentioned on this website, consult your own financial advisor to consider whether that is appropriate having regard to your own objectives, financial situation and needs.

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