Working from home tax deductions
Posted by Northadvisory on June 23, 2020
Thousands of Australians changed their working arrangements this year. The COVID-19 pandemic meant that businesses around the country had to move away from the normal Monday to Friday office environment and support their staff as working from home became the new normal.
With this significant shift of people to their home office, the ATO recognised the need to introduce a simple method of calculation for work expenses. On 7 April 2020, they announced their special arrangements to make it easier for people to claim tax deductions.
The introduction of the new, temporary calculation method means that there are now three different options available when you want to determine your expenses total. Each method has its benefits and we’ve examined them in detail for you.
The ‘short-cut’ method
The short-cut method is the ATO’s interim solution that is designed to help people who are new to the working from home model and are unaccustomed to tracking expenses. It is an easy way to calculate your deductions with minimal record keeping requirements.
The ATO’s media release states:
Assistant Commissioner Karen Foat said the new shortcut method will make it easier for those who are working from home for the first time.
“The shortcut method provides a rate of 80 cents per hour and will only require you to keep a record of the number of hours worked from home.
This recognises that many taxpayers are working from home for the first time and makes claiming a deduction much easier. If you choose to use this shortcut method, all you need to do is keep a record of the hours you worked from home as evidence of your claim.”
“You can claim a deduction of 80 cents for each hour you work from home from 1 March to 30 June 2020 as long as you:
- are working from home to fulfil your employment duties and not just carrying out minimal tasks such as occasionally checking emails or taking calls
- have incurred additional running expenses as a result of working from home.
This method covers all additional deductible running expenses, including:
- electricity for lighting, cooling or heating and running electronic items used for work (for example your computer), and gas heating expenses
- the decline in value and repair of capital items, such as home office furniture and furnishings including capital items that cost less than $300
- cleaning expenses
- your phone costs, including the decline in value of the handset
- your internet costs
- computer consumables, such as printer ink and stationery
- the decline in value of a computer, laptop or similar device.”
Because this method is temporary and supports people who are new to working from home, you do not have to have a dedicated work area, such as a separate home office.
Currently this method is only applicable to expenses incurred from 1 March 2020 to 30 June 2020. If you have incurred expenses prior to 1 March 2020, you will need to use one of the following existing calculation methods.
The ‘fixed rate’ method
The first of two existing tax deduction calculation methods is known as the fixed rate method and you are required to retain more detailed information.
From the ATO’s website –
“You can claim a deduction of 52 cents for each hour you work from home for your work-related expenses. The fixed rate covers all expenses you incur for:
- the decline in value of home office furniture and furnishings
- electricity and gas for heating, cooling and lighting
- the cost of repairs to your home office equipment, furniture and furnishings.
To claim using this method, you must keep records of either:
- your actual hours spent working at home for the year
- a diary for a representative four-week period to show your usual pattern of working at home.”
If you choose to diarise a four-week period, this can be applied to the rest of the year to enumerate the total tax deduction. But the ATO notes that if your work pattern changes through the year, you must reassess your calculations. Unlike the short cut method, to use the fixed rate method, you must have a dedicated work space in your home.
Continued from the ATO,
“This method doesn’t include the following, so you will need to separately calculate your work-related use for:
- phone expenses
- internet expenses
- computer consumables and stationery – such as ink
- decline in value of equipment – such as phones, computers and laptops.
To claim the work-related portion of these expenses you must have records such as:
- receipts or other written evidence that shows the amount spent on expenses and depreciating assets you purchased
- phone accounts identifying your work-related calls and private calls to work out your percentage of work-related use for a representative period
- a diary that shows
- a representative four-week period of your usual pattern of working at home
- any small expenses ($10 or less) that you can’t get a receipt for totalling no more than $200
- your work-related internet use
- the percentage of the year you used depreciating assets exclusively for work.”
For people who were already working from home before 1 March 2020, this fixed rate is likely to be the most straightforward calculation, but it is worthwhile considering the next method if you prefer to claim the exact costs you have incurred.
The ‘actual cost’ method
The most detailed option is the actual cost method. It can be complicated to measure but it is also the most accurate calculation you can apply to determine your tax deductions. Calculating expenses via this method can be time consuming but it could be beneficial if you believe it will result in the highest deductible amount.
“Under the actual expenses method, you can claim the additional running costs you directly incur as a result of working from home. This may include the following expenses:
- electricity and gas for cooling, heating and lighting
- the decline in value of home office furniture (desk, chair) and furnishings,
- the decline in value of phones, computers, laptops or similar devices
- phone expenses
- internet expenses
- cleaning (if you use a dedicated area for working)
- computer consumables and stationery – such as ink”
If you don’t have a separate work space or home office, the ATO states that your additional running expenses are minimal. They use the example of a lounge room where other household members could also be present undertaking their own activities while you are working. Therefore, additional costs for heating, lighting etc are not applicable to your running costs.
Continued from the ATO,
“To calculate the work-related portion of your actual expenses you must have records. You can:
- keep a record of the number of actual hours you work from home during the income year
- keep a diary for a representative four-week period to show your usual pattern of working at home
- keep receipts showing the amount you spent on the assets
- show the percentage of the year you used those depreciating assets exclusively for work – you can claim for the portion of the decline in value that reflects your work-related use of the depreciating assets
- work out the cost of your cleaning expenses (if you have a dedicated work area) – for example, a room set up as a home office, by adding together your receipts and multiplying it by the floor area of your dedicated work area (floor area of the dedicated work area divided by the whole area of the house as a percentage) – your claim should be apportioned for any
- private use of your home office
- use of the home office by other family members
- work out the cost of your heating, cooling and lighting by working out the following
- the cost per unit of power used – refer to your utility bill for this information
- the average units used per hour – this is the power consumption per kilowatt hour for each appliance, equipment or light used
- the total annual hours used for work-related purposes – refer to your record of hours worked or your diary for this information.
- work out the cost of your phone or internet plan expenses – where you receive an itemised bill, you need to determine your percentage of work use over a four-week representative period. See: Claiming mobile phone, internet and home phone expenses.
- work out the cost of computer consumables and stationery by keeping receipts for the items purchased.
You must take into account other members of your household when you work out your expenses. If a member of your household is using the same area of the house or the same service when you’re working, you must apportion your expenses accordingly.
To claim a deduction for an asset that cost $300 or more, you need to calculate the decline in value for both the period you:
- owned the assets during the income year
- used the assets for work-related purposes.
You can use the depreciation and capital allowances tool to calculate your deduction for the decline in value of equipment, furniture and furnishings that cost more than $300, use the depreciation and capital allowances tool to work this out.”
What you can’t claim
Finally, you should also note that there are some expenses you can’t claim as a tax deduction. If you work from home you can’t claim costs:
- for general items that would have been available if you worked in an office, such as toilet paper, coffee, tea or milk
- that relate to setting up children for online learning or home schooling, such as buying equipment, devices or furniture
- that your employer has reimbursed you for or items they have paid for directly, such as a laptop or a phone.
You also can’t claim expenses relating to residential occupancy, for example rent, mortgage interest, water and council rates.
Our team is here to help
We know that calculating expenses can be a challenging task… especially if you’ve never done it before. That is where our team of accounting specialists can help.
Here at North Advisory we can navigate you through the complexities of tax deductions and make sure you thoroughly assess all your allowances. If you’d like to find out more about how we can assist, please contact us today. Read more about business tax.