With an increased number of employees working from home due to the Covid-19 pandemic, home office expense claims have become more common deduction items for the 2020 tax year. Anyone who has worked from home, they may be able to claim a tax deduction for expenses they necessarily incur related to performing their work duties.
Traditionally expenses that can be claimed as a tax deduction by employees required to work from home includes two categories:
- Home office running expenses, and
- Occupancy expenses.
Home office running expenses
In most cases, claiming tax deductions for these items will require some substantive evidence which should be understood to demonstrate how the deduction has been calculated.
The ATO allows the following methods for calculating running expenses:
A fixed-rate of 52 cents per hour can be claimed for each hour worked from home and represents running expenses. This method is simple and more commonly used as it does not require full substantiation of actual expenses. Employees will need to keep a record of actual hours worked at home or a diary showing the usual pattern of working from home over a four week period (applied across the remainder of the year).
For instance, if an employee spent 10 hours per week for the whole year (48 weeks estimated after excluding public holidays and annual leave), the claim under this method will be 10 hours per week x $0.52 per hour x 48 weeks = $249.60.
This method covers heating, cooling, lighting, cleaning and the decline in value of the furniture.
If using this method, the following can be claimed in addition as per usage:
- Phone and internet expenses
- computer consumables and stationery, and
- a decline in value on the computer or other equipment
Employees claiming are required to separately work out their eligible claim for these items (as explained below).
Actual running expenses
To calculate the claim for running costs, as an alternative to the fixed rate method employees can use the actual running expenses method. This method is more complex requiring more detailed records but may result in a larger claim.
To use this method, they will need to work out how much of their household running expenses ‘reasonably’ relate to performing work in the dedicated office. As an example, a reasonable method of apportionment could include working out what floor area relates to the dedicated home office as a percentage of the total floor area of the home. This percentage is applied to actual running costs incurred during the period including electricity etc. Employees will need receipts of expenses and records to prove the claim.
Some common examples of working from home expenses an employee can claim a tax deduction for include:
- lighting, heating and cooling;
- costs of cleaning the home working area;
- the decline in value (or, depreciation) of equipment, furniture and fittings in the area used for work. Small capital items costing $300 or less may be claimed in full by individuals i.e. does not need to be depreciated;
- the cost of repairs to this equipment, furniture and furnishings; and
- other running expenses, including computer consumables (such as a printer, paper, ink etc.) and stationery.
Phone and internet expenses
If employees use the phone or internet for work, they can claim a deduction for the work-related percentage of these expenses if they paid for these costs and have records to support their claims. As above, they will need to formulate a reasonable method of apportioning their work percentage of claims, ordinarily done in the form of a logbook demonstrating a usual pattern of work use.
As an alternative, a tax deduction of up to $50 with limited documents can be claimed based on a set rate for work-related use of:
- 25 cents for calls made from a landline
- 75 cents for calls made from a mobile
- 10 cents for text messages sent from a mobile.
The shortcut method,
Since the beginning of 2020 Covid-19 made people working from home more intensively, the ATO has amplified the claim using the working from home shortcut method,
The shortcut method to claim tax deductions at a flat rate of 80c per hour.
This method is only available for hours worked from home from 1 March 2020 and unless extended, will apply to 30 June 2020. Claims before 1 March 2020 will need to be calculated using the above-mentioned methods.
This method covers all running costs (including depreciation, phone and internet costs), and there is no requirement to operate in a dedicated work area to claim a tax deduction under this method during the eligible time period.
All that is required is a record of the hours worked from home. Further, multiple people in the same household working from home can each make a claim under this method.
If a person worked from home prior to 1 March 2020, then they will need to use one of the other methods to calculate the claim for this period.
Home office occupancy expenses
Generally, an employee cannot claim a deduction for occupancy expenses, such as rent, mortgage interest, property insurance, land taxes and rates, unless their home office is a regular place of business. In the event that a home is a place of work, these expenses could be claimed, however, beware that claiming such expenses may have adverse tax consequences such as impacting the main residence CGT exemption.
Occupancy expenses can include:
- Mortgage interest
- House insurance
‘In order to claim occupancy expenses, you must be able to pass what the ATO refers to as the ‘interest deductibility test’
Frankly speaking, if you intend to claim a deduction on the interest you pay on your mortgage or rent paid to your landlord, the area you declare as your home office/place of business must have the ‘character’ of a place of business. It should meet the criteria, outlined by the ATO:
- clearly identifiable as a place of business, for example, you have a sign identifying your business at the front of your house
- not readily suitable or adaptable for private or domestic purposes
- used exclusively or almost exclusively for carrying on your business
- used regularly for visits by your clients.
How can BOA & Co. help?
If you need any assistance understanding the above, please contact us on 02 9904 7886 so we can help address your personal circumstances.