The world of working from home is a pretty sweet one. You can set your own hours and work in your pyjamas if you want to! But there are some things to be aware of when it comes to taxes.
This article will cover the ins and outs of what you can claim on your tax return, as well as how much time should pass before claiming certain expenses for tax purposes. So read on, so you know everything about this topic!
Working from home is a great way to save on commuting time and get more time with your family. But for some, working from home can also mean paying extra in taxes.
Working from home has become more popular these days, but did you know some deductions are different? As a result, it’s important to understand what you can and cannot claim when working from your home.
If you work from home, you might be able to claim a tax deduction for your home office expenses. However, there are limits to what can be deducted, so you must consult with a qualified accountant before claiming anything. This blog post will outline some of the deductible things and which ones should not be claimed.
Some people are fortunate enough to work from home. This may be because they have a physical disability that makes it difficult or impossible for them to commute or because they are self-employed and can do their job anywhere with an internet connection.
Working from home has many benefits, but there are also some tax implications you should know about before filing your taxes this year.
It’s not always easy to work from home, but there are a few things that you can do to make it more manageable. One of the most important factors is deducting any expenses that you incur as a result of your home office. This article will outline what deductions are available and which might be applicable for working at home situations.
Income tax may also be an issue if you work from home, depending on how much time you spend in your business versus general household activities.
The less time spent working at home, the lower your tax burden will be because the only income generated from those hours spent in the office could be subject to taxes — not all income earned during the year. Keep reading for information about how this works!
Working from home is a great way to get the best of both worlds, but it comes with its own set of challenges. One area that can be confusing is taxes. What expenses are deductible? What should you not claim? How do I calculate my income?
To help clarify this issue, here is a list of deductible things for tax purposes when working at home.
What are the rules for claiming expenses when you work from home?
The way we work is changing, and for many people working from home is the new normal. This allows for a huge amount of flexibility, plus there are numerous ways to deduct home office costs in your tax return.
Many people don’t know they can claim for working from home and often miss out on valid deductions. But it’s important to make sure you stay within the rules to avoid being penalised for making a mistake.
If your home is your place of work and you have an area set aside exclusively for work activities, you may be able to claim both occupancy and running expenses.
Suppose you carry on your work or business elsewhere (such as an office) but occasionally do some work at home. In that case, you cannot claim occupancy expenses even if you have a home office area set aside.
The most common errors are: claiming too high a work-related proportion for a particular type of expense, claiming something that shouldn’t be claimed at all or simply not keeping records to substantiate the expense.
If you work from home (either part-time or full time), then some portion of the home office expenses may be claimed as a tax deduction.
However, if you set up your home office in a shared room or have a dual purpose (such as a living or dining room), you can only claim the expenses for hours you had exclusive use of the area.
Home office expenses you might be able to claim include:
1. Occupancy Expenses
Such as rent, mortgage interest, rates, land taxes and house insurance premiums (but only in limited circumstances).
2. Heating, Cooling And Lighting
You have to heat your home office in the winter and keep it cool during the summer. You also need light to see what you’re doing!
That means that you can claim a proportion of the various household utility bills related to your time working in your home office.
You can’t claim for periods where the home office space is being used for other purposes, nor can you claim for the element of your bills relating to the rest of your home.
3. Home Office Equipment, Including Computers, Printers And Telephones
You can claim the full cost (for items costing up to $300) or the decline in value (for items costing $300 or more). If you’re self-employed, you may be able to write off equipment irrespective of the cost immediately.
4. Work-related Phone Calls (Including Mobiles) And Phone Rental
You can claim a portion reflecting the share of work-related use of the line if you can show you are on call or have to phone your staff, employer, customers, or clients regularly while you are away from your workplace.
5. Depreciation Of Home Office Furniture And Fittings
If you kit out your home office with furniture such as desks, shelving and cupboards, you can claim a deduction for the decline in value of that furniture to the extent that it relates to your work activity.
That’s likely to lead to a write-off of the cost over several years (the “effective life” of the asset).
6. Depreciation Of Office Equipment And Computers
Similarly, if you purchase technology items for use in your home office, you can depreciate them over their life and claim a deduction each year for the work-related element. That might include:
- Mobile phones
Other items make sure you claim for the work-related proportion of other costs such as:
- Computer consumables (like printer ink)
- Telephone and internet costs
- Cleaning costs
- Costs of repairs to your home office furniture and fittings
7. How Much Can I Claim?
There’s no maximum amount that you can claim. However, provided that the amount you’re claiming is calculated following the rules and that you have the necessary substantiation to back up your claim, you can claim whatever you’re entitled to.
Methods Of Claiming Home Office Deductions
1. Receipts Or Other Written Records/Evidence
In making home office deductions, ensure that you can substantiate all expenditure claims through receipts of diaries. This includes:
- Receipts for items of equipment you have purchased
- Diary entries you make to record your small expenses ($10 or less) totalling no more than $200, or expenses you cannot get any evidence for, regardless of monetary amount.
- Diary indicates your running expenses related to working in your home office. Here, it would be best to detail the time you spend in the home office compared with other users. Keep a diary record for a minimum four-week representative period. This can also include calculations of how much you used your equipment.
- Itemised phone accounts from which you can identify work-related calls.
2. Australian Tax Office rate per hour
As an alternative to keeping such records, you can use a fixed rate of 52 cents per hour for each hour you work from home to allow for home office expenses. Under this method, you can also include the decline in the value of office equipment (such as computers and faxes) but not furniture. However, in this case, you are unable to make additional claims for individual items.
The following costs are not deductible as part of home office expenses:
- Mortgage or interest costs
- Rates and taxes
- Depreciation on the home.
The ATO has implemented a shortcut method to cover the period from 1 March to 30 June 2020. During this time, you claim a deduction for $0.80 per hour of documented work, and this covers all deductible running expenses.
The first – and by far the simplest – is a new “shortcut method”, which applies for the period between March 1 and June 30. All you need is a timesheet or other proof of your working hours to claim a flat deduction of 80 cents for every hour worked from home.
For an employee who worked 40 hours from home each week during the period, it amounts to a deduction of just over $500.
But note that if you use this method, you cannot claim any other expenses for working from home for that period.
However, workers who have incurred particularly high costs in working from home may better calculate their claim via one of two older methods.
The “52 cents” method is where you claim 52 cents for every hour worked at home to cover the costs of electricity, gas and home office furniture, and then add in separately the costs you have incurred for phone calls, internet, stationery and the decline in value of equipment such as laptops and phones.
Purchases under $300 can be claimed in full in the first year, while purchases over $300 must be spread over multiple years.
The “actual expenses” method is the most intricate, requiring you to individually calculate the work-related portion of all costs you have incurred working from home.
5 Tips To Get Home Office Deductions Right
The ATO generally classifies deductible expenses that crop up from working at home as being either:
- “occupancy” expenses, or
- “running” expenses.
As a rule of thumb, someone operating a home business from a dedicated area of the house will be able to claim both types of expenses.
Employees who do some work from home for convenience are generally only entitled to claim running expenses but not occupancy costs. Of course, there are exceptions to this general rule, and it depends on the person’s circumstances.
1. Occupancy Cost Deductions
These relate to expenses for using the home obviously, but not necessarily directly tied to the business itself. For example, these can be rental costs, perhaps mortgage interest if you qualify, council rates or insurance premiums.
To claim a deduction for any occupancy expense, the area you set aside for working needs to have the “character of a place of business”.
In other words, the room in your house that hosts “Hilda’s Hair Salon” or “Collin’s Consulting” should have the characteristics of a place that is exclusively set aside to offer whatever product or service that home-based business is involved in.
Taxpayers can generally claim the same percentage of occupancy expenses as the percentage area of their home that is used to make income (for example, if the home office is 10% of the total area of the home, then you can claim 10% rent costs, council rates and so on).
However, opting to claim occupancy expenses, especially mortgage interest, will mean you will be expected to account for any capital gain attributable to that same business area of the home when the house is sold.
The physical size of the business area is not always the most appropriate measure. The ATO may, for example, also accept an apportionment based on the proportionate market value of the area used for the business compared to the rest of the property if this differs markedly from proportionate size.
The ATO will also expect you to pro-rate your deductions on a time basis if you use the room for private purposes for a part of the year.
2. No Specific Work Area – No Occupancy Expense Deductions
You may still work from home but may not have a particular area set aside primarily or exclusively for these income-producing activities.
Tim, the teacher, for example, could be writing student reports next to the kitchen radio one day or on the front porch another day. There is no defined area where the work is done, but Tim can still claim deductions for utility usage such as gas or electricity (running expenses – see below). He needs to apportion expenses and be able to show how he reached these amounts.
Then there are phone costs for business use, and even the decline in value of “plant and equipment” (chair, desk, computer) to the extent that those items were used for his income-producing activities.
However, he will be unable to make any claims based on renting or owning the house and rates or insurance (that is, occupancy costs).
3. Running Expenses
These can generally be viewed as those costs that directly result from using facilities in the home to help run the business or to enable you to do a bit of work from home. These would include electricity, gas, phone bills and perhaps cleaning costs.
Running expenses may be deductible where someone with a home office can establish that they have incurred additional expenditure on the running expenses due to their income-producing activities.
Essentially, taxpayers can claim a deduction incurred through their income-earning activities in addition to their private expenditure (our emphasis).
4. Bundled Phone And Internet Plans
It is common for households to subscribe to “bundle” plans. These subscriptions typically give the household access to two or more services (typically phone, internet, and subscription television services) from the same service provider. One periodic (usually monthly) fee is charged for the single bundle.
The bundle fee is always lower than the sum of the fees the taxpayer would have to pay if they subscribe to each service separately. This is a critical characteristic of a service bundle as it affects the calculation of the deductible amount.
It is necessary to match work-related use to particular costs appropriately. The ATO suggests that the bundle cost can be separated into different components as follows:
- an apportionment based on the supplier’s breakdown of the relative cost of the bundled components
- an apportionment based on the relative costs of the bundled components as if they were purchased separately from the same supplier, or
- if there is no breakdown available, an apportionment is based on information obtained from a comparable supplier.
5. The “Cents Per Hour” Method – An Easier Way To Calculate Running Expenses Deductions
The ATO offers taxpayers an administrative concession for calculating running expenses deductions.
You are still required to record the number of hours worked at home but are relieved of the burden of calculating the precise deductible amount for each running expense.
So if you’ve been diligently working away at home, whether as an employee or in your own business, speak to us about claiming all your rightful deductions.
1. Can you claim the value of a home desk you bought pre-COVID-19?
So, if you’re using, let’s say, the actual expenses method and you want to claim deductions for an asset that costs more than $300, then it depends on the useful life of the asset. For example, laptops have a useful life of two years, so they’re normally written off over two years.
Desks are quite a bit longer, so you may be able to claim a portion of a desk that you’d bought more than a couple of years ago. But you would need the receipt and, whether or not you’re using it for work purposes, it declines in value from the moment you purchase it.
So you’ll have to work out how much it’s declined in value from when you bought it through to now and then this year, how much has it declined in value and how much have you used it for work purposes.
2. What if you bought home office furniture second hand?
That’s a very good question. It would be best if you still showed enough to show a) that you spent the money b) what you spent it on.
So, if you’ve got that combination of things between your Gumtree and your bank statement, you’re probably starting to get close to having enough information.
3. Can you claim everything from Officeworks? For example, a label maker you use for the home organisation?
So, we’d come back to our three golden rules of deductions.
You need to have spent the money and not been reimbursed for it, the item needs to be directly for work-related purposes, and you can’t claim any private use of an item, and, finally, you need a record to prove it. That record needs to show that you spent the money and what the item was – not just that you paid a certain supplier a certain amount …
If you bought something and it’s actually really for private purposes, and then you decide, oh, I’m just going to print one label to make it work-related, that’s not going to fly.
4. What if you buy deluxe stationery?
We try to be quite pragmatic … in an audit situation; we will actually go back to those golden rules.
So, if you’re using these things 100 per cent for work purposes – and that’s the only reason that you’ve got them – you’ve spent the money, and you’ve got a record to prove it, then you’re going to be able to claim your stationery.
But if you’ve bought a fancy planner from a place like the one you’ve described and you’re using it partly for work but you’re also using it a fair bit for private – or even just a little bit for private – then you need to take into account that private use.
5. Can you claim a $700 pen from Mont Blanc?
We think you’d have a fairly hard time. Something of that value would be a depreciable asset anyway, being that much. But we think you’d find it hard to justify that you need a $700 pen to do your work. It’s not actually that substantially different from a $2 pen.
We’re sure it’s much nicer and writes smoother. But, look, we try to be fair and reasonable with people, but at the same time, we’re trying to be quite generous with people in having an easy way to calculate from that 80 cents per hour method.
But if people have bigger expenses and want to use one of the other methods, that’s fine. But we also can’t let people take us for a ride. So, you know, a little bit of overclaiming by many people adds up to billions of dollars every year.
We want people to claim what they’re entitled to, but we also can’t turn a blind eye to overclaiming. So people need to have a good position about what they’re going to claim.
6. Do you need a dedicated work area to make a working from home claim?
We’ll clarify: for the shortcut method, you don’t need a dedicated work area. However, you do need a dedicated work area for the fixed-rate method – so 52 cents per hour plus some other things.
If you’re not claiming for household running costs such as cleaning, heating, cooling, and electricity, you don’t need a dedicated work area for the actual costs method. But if you’re going to try to claim for those sorts of things, you need a dedicated work area.
7. Do you need a separate study, or does a corner of an open-plan living area qualify as a dedicated work area?
Yeah, you can make the case that that is a dedicated working area. Lots of houses are sold with something like a study nook …
But if you’re doing the actual expenses method rather than the fixed-rate, then you’ll also be looking at your floor area that that study nook takes up, and so you’re probably looking at quite a small area if that’s what you’re talking about and that will reduce your claim.
8. What about a dining room table?
You can’t kind of say, like, the left-hand side of my dining table is my dedicated work area … if you’re using part of your dining table, you don’t have a dedicated work area.
9. Is it ever OK to claim snacks?
No. And look, that’s a big myth. So many people think that, oh, but my workplace used to provide me with tea and coffee and biscuits if they’re lucky, and we even had some questions earlier in the year about toilet paper, which was quite topical at the time.
Because, of course, your employer – well, we hope your employer – provides you with such things when you’re working in the office. But just because you’ve got to buy those things when you’re at home does not mean that you can claim them.
10. Can you claim expenses like your mortgage, rent and council rates?
Those things are really limited to where your home is a proper place of business. So it’s more likely to apply to a small business person who is actually running their business from home, and they might have business signage and a place where clients visit and those types of things.
Most employees are not going to meet those requirements. And what’s important is that if they do, then there will be capital gains tax consequences at the other end because then they’ve claimed for business use of their asset and so they won’t be able to get the full main residence exemption when they sell their home.
11. What if you’re a couple working from home together? Do you need to split bills?
So, under the actual expenses [method], you can only claim your actual expenses.
So you have to do some calculations to work out what those actual expenses are, and where you’ve got multiple people working from the household, that can get quite tricky to work out, and that’s why we’ve developed the short cut method so that it’s really easy for people to work out what they can claim.
But people are entitled to do those calculations. But they need to work out what is their own personal part of those expenses.
12. What about the cost of Zoom calls?
Internet usage can be quite difficult for people to calculate. So, some people might be able to do that.
But you need to look at how much data has been used and then work out for what different purposes in the household have been used and then, therefore, which bit of the data relates to your work.
So it can get quite complicated. But that is what you need to do if you want to claim under one of those existing methods.
13. What about if you’re not the person paying the bills?
If you’re living at home with mum and dad, and you’re not paying any of the bills. Your work has given you a phone, a laptop, a data plan, all your stationery, and you’re not actually having any extra costs at all as a result of working from home, then you can’t claim anything.
14. Can you claim the cost of a uniform even if you’re not using it due to COVID-19?
So, if you had to buy a uniform and then it turns out that you didn’t get to use it much – or at all – but it was something that your employer required you to purchase, and you’ve got your receipt and everything like that, then you can still claim the cost of the uniform itself.
But … people also, of course, claim the cost of laundry of said uniforms, and lots of people claim the same amounts year after year. And if what you’re claiming for is the same as it is every year and you’ve got working from home claim, we may ask some questions like: were you wearing your uniform while you were working from home? And were you required to?
It’s pretty unlikely. So, look, people’s circumstances have changed this year. For some people, they’ve still been working on the front line and wearing uniforms, and their claim might well be the same. But then, we wouldn’t expect to see a large working-from-home claim from those people either.
15. Can you claim travel from your home office to your actual office?
Many people think that just because they’ve been working from home as a result of COVID- 19, and then they go into the office occasionally, lots of people think they can claim that trip.
But your home is still a private residence, and you cannot claim your trip from home to your regular workplace.
16. Are there penalties for bogus claims?
There can be penalties that apply. So, when we do an audit, if we find that you’ve deliberately done the wrong thing, not only do you have to repay the amount of tax, there will usually be interest on that.
So there can be a range of penalties, and it can even lead to prosecution if people are then asked for documents and provide false documents. So it is quite a serious matter.
17. Any final advice?
We expect that there will be a large increase in people claiming working-from-home expenses, and that’s part of why there is the “80 cents per hour” shortcut method because we also know that it’s an area where people do make a lot of mistakes.
So if we’ve got many extra people who have those types of expenses this year, we wanted a way that’s really easy for them to get it right, and we think it’s quite generous.
If you’re working from home full-time from March 1 through to the end of the financial year – let’s say it’s a 40-hour week, for argument’s sake – that’s a deduction of just over $500.
So, we know sometimes people think 80 cents per hour doesn’t sound like a lot, but when you add it up across the period that we’re talking about, it does actually add up to a fair bit.
We would also say to people who have unusual things that they want to claim: only claim what you’re entitled to.
Don’t try and push the boundaries because it can result in a) slowing your return down or b) it can result in a bill later on because we can’t turn a blind eye to these things.
The best thing they can do always comes back to those three golden rules: so, they have to have spent the money and not been reimbursed, it needs to be for work-related purposes, and you can’t claim for any private use, and you need to have a record to prove it. So, always come back to those three golden rules.