Please note: The ATO announced enhanced deductions on 7 April 2020 which are listed on its website here.
With most people being required by their employer to work from home, I thought it would be timely to update you on what deductions you can claim in respect to a home office, and what evidence you need to substantiate a deduction.
Start keeping record now
Remember, the onus of proof is on the taxpayer to substantiate any deductions they claim. If you use a tax agent, you probably won’t have to lodge this year’s income tax return until March 2021. How likely is it that you will remember everything you did and all the purchases you made in March 2020, one year from now? Unlikely right. Therefore, its best to start keeping records now.
Expenses you may be entitled to claim
Here’s a list of expenses you can typically claim.
These expenses include heating, cooling, lighting, cleaning, and so on. There are two methods you can use to calculate this deduction:
- Fixed rate – You can claim a deduction of 52 cents for each hour you work from home instead of recording all of your actual expenses for heating, cooling, lighting, cleaning and the decline in value of furniture. You can either keep a record of the number of hours you have worked from home during the coronavirus period. Or, if you regularly work from home, you can keep a diary for a representative 4 weeks; or
- Actual costs – You can use this method if you have a dedicated workspace and you can accurately apportion costs such as power, heating, cleaning and depreciation. You still need to keep a 4-week diary or actual record of hours worked to support your calculations.
Obviously, for most people, the fixed rate option is the simplest. More information is available on the ATO’s website here.
Items such as software subscriptions, stationery, paper for your printer and printer ink can be tax deductible. You must retain receipts as evidence.
Mobile phone & internet expenses
There are two methods available to use to determine your tax deduction for mobile phone usage:
- A total deduction of $50 with limited documentation required. This method is appropriate when your device usage is incidental; or
- Claim a proportion of actual expenses. To work out the actual work-related proportion, you need to consider the amount of usage solely for work compared to the overall usage. Usage could include functions such as voice calls, text messages, data and app usage. You need to keep a diary for a representative four-week period to support your claim.
Computer and office equipment
If the cost of the equipment is less than $300, then you can claim a full deduction in the financial year the purchase was made. If the equipment costs more than $300, you must depreciate the item over its useful life. Note, if any equipment purchased is partially used for private use purposes, you will need to apportion the depreciation for its work use percentage.
Expenses you may not be entitled to claim
Here is a list of expenses that you are not able to claim.
Rental expense or mortgage interest (occupancy expenses)
Generally, you cannot claim a deduction for interest cost or rent paid in respect to a home office. However, if a dedicated portion of your home is your principal workplace, then you can claim a portion of occupancy expenses. Generally, you would apportion the work-related and non-work-related expenses by floor area.
Travel between home and work
Generally, you are not entitled to claim a deduction for the cost of travel between work and your home office e.g. if you need to go into the office to collect items.
Certain government expenses
If you were to make a claim using the actual method, you cannot claim items such as council rates, land tax and water rates.
If your expenses are reimbursed by your employer, you will not be able to claim these work-related expenses. However, if your employer has paid you an allowance for work related expenses, you can claim a deduction against this allowance.
No capital gains tax
In most cases, there are no Capital Gains Tax (CGT) consequences of running a home office.
Generally, if you use your home for an income generating/business purpose, you would normally only be entitled to a portion of the main residence CGT exemption. That is, you wouldn’t be entitled to a 100% exemption. This is true if you claim occupancy expenses. However, if you do not claim occupancy expenses, then you would obtain the full main residence CGT relief.
The ATO’s Golden Rules
The ATO has provided three rules in determining whether the deduction your claiming is eligible:
- The taxpayer must have incurred the expense themselves – and not have been reimbursed.
- The expense must be incurred in gaining or producing assessable income.
- The claim must comply with the substantiation rules – i.e. all records must be kept.
Remember, the onus of proof is on the taxpayer. It is important to know what you’re eligible to claim before lodging your tax return. Don’t be too aggressive just to save a couple of dollars in tax – it’s not worth the risk of attracting an audit.
The risk of denied tax deductions falls on the taxpayer, not their accountant. This blog tells you more about how the ATO is auditing these matters. It is imperative to get the right advice before claiming your deduction.
Home office expense calculator
The ATO has a home office expense calculator here.
I hope you and your family are safe and keeping well. If we can be of any assistance, don’t hesitate to reach out to us.