With so many people working from home right now, their attention will ultimately, once present concerns are alleviated, turn to how they can claim back the cost of doing so on their taxes.
So to help our Business Owner Clients to support their Employees, and of course to help our Employee Clients, we have created CapitalQ’s Guide to Claiming Home Office Expenses for Employees (now including the latest announcements from the Government as of 7 April 2020)…
CapitalQ’s Guide to Claiming Home Office Expenses for Employees (Pandemic Edition)
Who the Guide is for…
As the name suggests, this guide is for Employees. Those that work for an Employer who they are not otherwise related to as an owner, shareholder or controller of the business.
The rules and guidance for business owners, shareholders and the like can vary a little to those discussed below, so if you own your own business, the following may not address all elements of claiming home office and related expenses as they apply to you.
You Can’t Claim a Deduction for Costs you Don’t Actually Incur
Contrary to popular belief, you can’t claim a tax deduction for something where you haven’t actually incurred the cost.
So, it’s important to understand this and accept that you don’t just get to reduce your tax just because you did some work from home.
You need to have incurred additional costs by doing so.
Further, generally, you must have incurred the cost during the tax year in question, and it should be the case that you would not have incurred the cost but for having worked from home.
(We say ‘generally’ because when it comes to depreciation of equipment and furniture, it is ok if the original purchase of the item was incurred in the past, see below for more details.)
We consistently hear instructions from taxpayers to “just claim the standard allowable amount”. But, when it comes to Home Office Expenses, and just about everything else in tax, there is no “standard allowable amount”.
You Can’t Claim a Deduction for Costs you are Reimbursed for
If you are lucky enough to be reimbursed for costs you incur while working from home, then you aren’t actually out of pocket and therefore you can’t claim the cost against your tax.
You Can’t Claim a Deduction without Having Evidence to Prove It
While the amount you claim and the way your claim is determined will impact what level of detail your evidence must comprise. There are few, if any, scenarios where you can claim a tax deduction without having some evidence to prove you incurred the cost, and that it was related to your income production.
Now when it comes to tax time, your CapitalQ Tax Accountant will do all they can to help you maximise your tax deductions. And if you advise us you have incurred an expense that is tax deductible, we will assist you to claim it, sometimes even if you aren’t able to show us your evidence. But, any deduction entered into your tax return will always be done on the basis and understanding that you have the relevant evidence, and that you will be able to produce it if the ATO asks to see it.
Three Potential Working from Home Scenarios
There are three potential scenarios where an Employee may work from home. Which scenario you fit into will determine what type of home office expenses you can claim against your employment income.
Scenario 1 – Home is your principal place of work (effectively meaning you work from home the majority of time and the arrangement is part of your employment agreement with your Employer). In this case you are expected to have a dedicated work area that is unlikely to be suitable for domestic use.
Scenario 2 – Home is not your principal place of work but you have a dedicated work area which you use to regularly work from home (for example a study).
Scenario 3 – You perform some work at home, but you don’t have a dedicated work area (for example, you use a room with a dual purpose such as working at the kitchen table or on the couch in a living room).
NEWSFLASH and UPDATE as of 7 April 2020 for those affected by the Covid-19 Pandemic
The Government has today announced a new “Short Cut Method” for determining some of your Home Office Expense tax deductions where you are temporarily required to work from home due to the Covid-19 pandemic.
You will see below, we detail five different types of Home Office Expenses. These changes announced do not affect Type 1 – Work Related Consumables Expenses nor Type 5 – Work Related Home Occupancy Expenses. However, to make it easier to claim Types 2, 3 and 4 a new “Short Cut Method” can now be used.
What this means is that from 1 March 2020 (previously 12 March, since revised), you can simply record all the hours you work from home. Then multiply that number of hours by 80 cents to give you your total tax deduction for Type 2, 3 and 4 home running expenses.
If you wish, you can still use the standard methods described below to calculate these three expense types, but you can now also choose to use the Short Cut Method instead if you prefer.
As an example, under the new Short Cut Method, someone who works from home every day from 12 March until 30 June and who keeps a record of their hours worked, will be able to claim a tax deduction for Type 2, 3 and 4 home running expenses of $456 calculated as follows –
76 Work Days from 12 March to 30 June (excluding Public Holidays) x 7.5 hours per day x 80 cents = $456
You will still need to determine your Type 1 – Work Related Consumables Expenses and if applicable Type 5 – Work Related Home Occupancy Expenses as described below…
Types of Home Office Expenses
The type of home office expenses you may claim under each scenario is as follows –
|Expense Type||Expense Deduction Allowable?|
|1 – Home is your principal place of work and you have a dedicated work area that is unlikely to be suitable for domestic use.||2 – Home is not your principle place of work but you have a dedicated work area.||3 – Home is not your principle place of work AND you do not have a dedicated work area.|
|1. Work Related Consumables Expenses||Yes||Yes||Limited|
|2. Work Related Home Running Expenses incl. Depreciation of Home Office Furniture||Yes||Yes||Yes|
|3. Work Related Phone & Internet Expenses||Yes||Yes||Yes|
|4. Work Related Decline in Value (Depreciation) of Home Office Equipment inc. Computers||Yes||Yes||Yes|
|5. Work Related Home Occupancy Expenses||Yes||No||No|
1. Work Related Consumables
Generally, we would expect any consumables you require will be provided by your Employer, but where they are not, you can claim a deduction for expenses you incur (and are not reimbursed) for consumables such as –
- Note pads and writing paper,
- Printer paper and ink,
- Stationery including pens, pencils, paper clips, staples, post it notes and the like,
- Any other consumable items required to perform your work from home.
Determining Your Work Related Consumables Tax Deduction
Generally when you are required to incur a cost for work related consumables you intend to use the item entirely for work purposes and therefore you can claim the cost in full.
However, if you will use it both for work and private purposes, then you need to use a reasonable basis to apportion that cost.
This might be the case for a pack of pens where some are used for work and others used by the kids for school. A simple calculation of the number used for work as a percentage of the total pens multiplied by the total cost will give you your tax deduction.
Similarly, for printer ink where the printer is used both for work and non-work purposes. A simple calculation of the number of pages printed as a percentage of total pages printed multiplied by the cost of the ink will determine your tax deduction.
The invoice or receipt for the purchase will be the first form of evidence to prove the cost was incurred and that it was incurred during the relevant tax year.
For expenses that require apportioning, some written record of how you determined the work related portion will be required.
In the case of the pens above, a simple notation showing number used for work versus number used privately will do. In the case of the printer paper, ideally you will count the number of pages printed for work purposes over an indicative period, generally 4 weeks, and record that as a percentage of the total pages printed during that period.
2. Work Related Home Running Expenses
Think of the majority of home running expenses as those that would be nil, or close to it, if your house was unoccupied for an extended period of time.
The obvious ones being –
- Gas (where used for heating, not if just used for cooking assuming cooking is not part of your work)
- Home office cleaning costs
- Repairs to your home office equipment and furniture
Home running expenses also include the decline in value (depreciation) of your home office furniture (Note: Decline in value of computers and I.T. equipment is dealt with separately and not included in the classification of Home Running Expenses for the purposes of this article.)
Working from home will incur these costs over and above what you would otherwise incur if you were not working from home. Or at the very least they will be incurred in connection with the work you perform from home. Therefore, the portion of these costs connected to your working from home may be claimed.
(Note: Water consumption is generally not included in the home running expenses you can claim a tax deduction for. That is because for the very most part, use of water for washing and drinking are private matters that would be incurred regardless of whether you worked from home or not. However, if you could prove excessive water used due to your working from home, it is possible to add a proportion of water consumption to your total deduction claimed.)
Determining your Home Running Expenses Tax Deduction
There are two ways to calculate your claim for Home Running Expenses –
- Fixed Rate Method
- Proportion of Actual Expense Method
Fixed Rate Method
The fixed rate method applies to working from home Scenarios 1 and 2. It is by far the easiest and most popular method to determine your tax deduction for Home Running Expenses.
If you fall into either of the above scenarios, to help make tax time easier, you may choose to simply claim 52 cents (for the 2019/20 year) for every hour you worked from home during the year.
Therefore, in order to use the fixed rate method, you must determine the number of hours worked from home in your designated work area and multiply those hours by 52 cents to determine your deduction.
Proportion of Actual Expense Method
The proportion of actual expense method can be used under working from home Scenarios 1 and 2 if so desired, but it must be used for Scenario 3.
It is generally the more time-consuming (though sometimes more rewarding) method to determine your eligible deduction for Home Running Expenses.
It once again requires you to determine the number of hours worked from home. It will also require determination of when you worked from home while others were also in the home at the same time.
You are required to use a reasonable method to determine the deductible portion of your various Home Running Expenses. And the method used for each component of your Home Running Expenses is likely to vary.
The way you would generally determine your deduction for each component is as follows –
- Electricity & Gas – Determine your average cost of electricity and gas heating per hour and multiply it by the hours you work from home. Then apportion it further (usually on a floor area basis) to take into account other non-work activities occurring within the house at the same time.
- Home office cleaning costs – Determine your total cleaning costs for the year and apportion them by the floor area of your work area relative to the floor area of the entire house. Then apportion it further for the time the work area was used exclusively for work purposes relative to when it was used for non-work purposes.
- Repairs to your home office equipment and furniture – Determine your total repairs then apportion it for the time it was used exclusively for work purposes relative to when it was used for non-work purposes.
- Depreciation of Home Office Furniture – Calculate the depreciation for the year, then apportion it for the time it was used exclusively for work purposes relative to when it was used for non-work purposes.
You can see that when attempting to estimate the portion of these expenses that would be deductible when you don’t have a designated work area (ie. where you have to apportion for the fact others are in the room and/or that the room is always used for other purposes at the same time as you are using it for work) means that the Home Running Expenses you can claim under Scenario 3 are limited.
Under the Fixed Rate Method, a diary is required to be maintained for an indicative period or at least four weeks. It should record the number of hours worked and can then be used to extrapolate for the year (allowing for holiday or other periods where little to no work is performed).
As mentioned, the four week period must be indicative of normal use, if it is not, either a further diary will need to be maintained or some other reasonable method of adjustment over the course of the year must be made and some written record of why the changes occurred retained.
Under the Proportion of Actual Expense Method, a diary is also required to be maintained as above but in more detail including recording the presence of others in the house.
The floor area of the work space will need to be measured and calculated as a percentage of the total floor area of the house.
Further, all invoices and receipts for the various Home Running Expenses will need to be maintained.
Finally a record of your actual apportionment calculations performed in reference to the various evidence will also need to be retained in case of ATO scrutiny.
3. Work Related Phone & Internet Expenses
Where you use your home phone, your mobile and/or your home internet for work purposes, you may claim a portion of your total expense for tax purposes.
Determining Your Work Related Phone & Internet Expenses Tax Deduction
Again there are two options for how you determine your claim –
- $50 Method
- Portion of Actual Expense Method
The $50 Method can only be used up to a maximum of a $50 deduction for all phone and internet usage expenses. If you wish to claim more, you will have to use the Portion of Actual Expense Method below.
It means the $50 Method really only applies to those who have some incidental use of their phones and/or their home internet for work purposes.
Taxpayers using the $50 Method are only required to keep basic records to show how they arrived at their claim without the need for keeping detailed written evidence.
They can base their records on the following:
- Home phone, use a rate of 25 cents per work call,
- Mobile phones, use a rate of 75 cents per work-related call and 10 cents per work-related text message,
- Device data usage, base the claim on time spent or data used for work purposes (compared to all other usage by the taxpayer and other users).
Portion of Actual Expense Method
You must use a reasonable basis for apportioning work related versus private components of each expense.
In the case of home and mobile phones, you could calculate the total number of work related calls made and received relative to the total of all calls made and received.
Otherwise you could calculate the total time spent on work related calls relative to the total time spent on all calls.
In the case of the $50 Method, a log of actual calls and usage will need to be retained for an indicative four week period along with the extrapolation calculations.
In the case of the the Portion of Actual Expense Method, similarly a log or diary will be required to be maintained for an indicative four week period though generally in more detail sufficient enough to determine a percentage of total usage that is work related. The period must be indicative of the entire year’s usage or else the diary should be maintained for a longer period. All invoices and receipts for each expense along with detailed calculations of the portions to be claimed for the year will also need to be maintained.
4. Work Related Decline in Value (Depreciation) of Home Office Equipment inc. Computers
As indicated above, the depreciation of home office equipment other than furniture (such as computers and printers) is determined separately from the home running expenses.
If you use such equipment that you already own, or that you purchase new during the year, you can claim a portion of the depreciation on them against your taxes.
Determining Your Work Related Depreciation of home office equipment Tax Deduction
For items you already own, you will need to calculate the depreciation since you purchased them until the beginning of the current year. Then you can use the opening balance to determine the depreciation for this year.
For items you purchase during the year, if the cost is less than $300 you can depreciate the full amount. If it costs more than $300, you must calculate the depreciation based on its effective life and apportion it for the number of days you owned the item during the year.
In all three cases above, you must then apportion the depreciation based on the time used for work purposes as a percentage of the time owned throughout the year.
In all cases you should retain the original invoice or receipt when the item is purchased. For items you already own, a bank statement showing the cost of purchase will suffice if the invoice or receipt can’t be located.
A record of your detailed calculations will then be required, including any reasoning for the effective life you have chosen if different from those published by the ATO for a specific item.
Finally, your diary of work usage versus non-work usage, generally for a minimum of 4 indicative weeks, will be required in order to prove how you apportioned the claimed between work and private depreciation.
5. Work Related Home Occupancy Expenses
As indicated above, Home Occupancy Expenses are only able to be claimed by those whose home is their principal place of work AND they have a dedicated work area that is unlikely to be suitable for domestic use.
It generally means you can only claim the work-related proportion of your home occupancy expenses in two very limited circumstances such as –
- The space in your home is a place of business, and not suitable for domestic use – for example, a doctor or dentist surgery or a hairdresser studio in the home, or
- No other work location is provided to you by your employer and you as the employee is required to dedicate part of your home to your employer’s business as an office or other dedicated work space.
As you can see, you can only claim the portion of home occupancy costs that relate to a clearly identified space used specifically for work.
And this generally means employees are not able to claim occupancy expenses.
Having said that, current events raises doubts, and questions, about that statement –
- If I am presently not able, or even just advised against, going in to work, is my home now my principle place of work?
- Will current events result in a permanent shift in the way many jobs, particular office based jobs, are performed?
In regards to the first question, if prior to the current pandemic your home was not your primary place of work, then you working from home temporarily (even if temporarily becomes several weeks or even months) is still unlikely to qualify your home as your primary place of work.
In regards to the second question, if as a result of current events the way you work does permanently change, then yes, it may become more likely that you fit into Scenario 1 and your home does ultimately become your principle place of work.
Home Occupancy expenses include:
- mortgage interest
- property insurance
- property rates and taxes.
Determining Your Work Related Home Occupancy Expenses Tax Deduction
If you are eligible to claim home occupancy expenses, you can work them out by performing the following calculation –
Total Home Occupancy Expenses × Floor Area of the Work Space × Percentage of Year that Part of Your Home was used Exclusively for Work
Documentation from your employer regarding your requirement to primarily work from home and to maintain a specific work area.
Photo evidence of that work area is also recommended.
All invoices and receipts of home occupancy expenses will need to be maintained.
Drawings showing the floor area of the work space relative to the rest of the house should also be retained. As should, once again your diary evidencing the percentage of the year that the space was used exclusively for work.
Warning Regarding Claiming Home Occupancy Expenses!!!
If you claim Home Occupancy Expenses, you will no longer qualify for the Capital Gains Tax (“CGT”) Main Residence Exemption for the part of your home that you use for work.
This means when you sell your home, you will likely have to pay CGT on the sale. Where as had you not claimed Home Occupancy Expenses, the sale of your home would usually be entirely tax free.
Further, the more you look to bring ‘private like’ expenses into your tax affairs, it is only natural that the ATO are going to interrogate the merits of your argument more closely.
Given these two considerations, we advocate caution and diligence if you wish to claim the full range of possible Home Office Expenses including Home Occupancy Expenses.