Article

How to claim working from home deductions.

Kearney Group - Working From Home Illustration 01
12 August 2020 Read time: 11 min

 

Figuring out what you can and can’t claim in the way of working from home tax deductions is confusing at the best of times. With so many of us working remotely due to coronavirus, the 2019-2020 financial year will be one for the records.

Of course, if an accountant is preparing your tax return for the year, then they’ll take care of all of this for you and you can just go ahead, put your feet up and find something else to read.

If you’ve decided to DIY your tax return, however, this one’s for you.

In collaboration with our Business Advisory team, we’ve pulled together this primer, including an explanatory case study, to help you understand which deductions you may be eligible for and how to claim your WFH expenses.

As with any area in tax, it’s important to consider your personal circumstances – so remember this is a guide, you should seek help if you need and avoid assuming that what’s right for your friends, family or colleagues is right for you.

 

Step 1: Define how you work from home.

To understand what you’re eligible for, a good starting point is defining how you work from home:

A) you have a dedicated work area
B) you do not have a dedicated work area
C) you run a business from home with a dedicated work area

 

Option A. You have a dedicated work area.

 

This is a room in your house that can be uniquely identified, such as a study or home office that is used exclusively for work activities, but this location is not your principal place of business.

An example:

Jim is a legendary mortgage analyst working out of a Melbourne CBD skyrise and lives in a two bedroom flat in the suburbs. His employer, “Brilliant Finance” allows Jim to work from home on Fridays. To make the most of this, Jim has converted his second bedroom into a home office. He has a desk, computer, screen, office chair, document scanner and some filing cabinets in this room. Jim does not use this room for anything else other than work.

 

Option B. You do not have a dedicated work area.

 

Whilst you do sometimes work from home, you do not have a dedicated work space like a study or home office. Working from home might happen from your couch, lounge room or your dining table. Your principal place of work and business is not your home.

Jim’s example continued:

Jim decided he does not like living alone, so he leases out his spare bedroom to Tahlia. Due to space restrictions in the flat, Jim leaves his desk in Tahlia’s room. He uses this desk when Tahlia visits her parents once a week but he mainly works from the dining room table.

 

Option C. You run a business from home in a dedicated work area.

 

You run a business from home and work from a room set aside exclusively for business use.

Jim’s example continued:

Tahlia decides paying rent is too expensive and she moves back in with her parents full time. Jim is inspired to become a mortgage broker and decides to setup his own business. He uses Tahlia’s old room as a home office again. Jim occasionally goes out to meet his clients at their homes, but more often than not, he chats with his clients by video conference or over the phone from his home office. He has no other work space beyond the spare room which he uses exclusively for business purposes.

 

 

Step 2: Work out what you can and can’t claim.

When considering your possible working from home deductions, keep in mind the Australian Tax Office (ATO)’s three golden rules:

  1. You must have spent the money and not have been reimbursed,
  2. It must be directly relevant to you earning your income, and
  3. You must have a record to prove it.

 

Common WFH deductions.

 

The following table lists some common deductions that might apply, depending on whether you work from a dedicated home office or a more informal work space.

Kearney Group - Table: Common working from home deductions basic

This handy FAQ provides a lot more detail on working from home tax deductions and the other expenses you can claim.

 

Step 3: Find the best Method to calculate your expenses.

Three Methods for calculating your tax deductions.

 

The ATO allows for three ways to calculate possible deductions:

  1. A temporary Shortcut Method which applies to claims from 1 March – 30 June 2020.
  2. Fixed-Rate Method.
  3. Actual Expenses Method.

Taking a bit of time to consider the correct method for your circumstances is useful. Each method has its benefits and drawbacks and different record-keeping requirements, and are explained in more detail below.

For example, the Shortcut Method is a ‘flat-rate’ deduction that has been introduced to simplify claims for the many people working from home through coronavirus. Whilst it’s simple to calculate and needs little in the way of substantiation, it’s a blunt instrument that doesn’t really cover all that much. $0.80 per hour works out to only $6.40 per day for an eight hour day – even if you’re working from home full-time, this deduction would barely cover even the most basic phone and internet plans, let alone your increased heating, cooling and electricity costs. In this case, it might be worth looking at the other methods.

Which method you use for calculating your expenses and subsequent tax deduction is up to you.

In summary, you can use the method or methods that will give you the best outcome, as long as you meet the working criteria and record keeping requirements stated by the ATO.

Speak to an accountant if you have any questions or want to clarify the best way forward.

 

Step 4: Calculate your claim.

Shortcut Method: for work from home during COVID-19.

 

Given the many people working from home during coronavirus, the ATO has created a simplified Shortcut Method for calculating your expenses for the period 1 March – 30 June 2020.

This flat-rate deduction allows for $0.80 per hour for work done at home. You do not need to have a dedicated workspace. If you share the workspace with a spouse or housemate, you can both claim the deduction without issue.

If you use this method, however, you cannot claim any other expenses like your electricity, gas, phone and internet bills or the cost or decline in value of your equipment and furniture.

 

What do you need to do?

  • You will need to keep a timesheet or diary detailing the number of hours you’ve worked from home during the period.
  • For this method, you do not need to keep copies of your receipts or bills for the period.

 

How do you calculate your claim?

 

Take the hours you worked from home from 1 March – 30 June 2020 and then multiply the number of hours by $0.80.

Hours worked from home for the period * $0.80 = deductible amount

Shortcut Method: Let’s revisit Jim’s situation.

 

Jim is getting ready to do his last years’ tax return.

The period 1 July 2019 to 29 February 2020 falls outside the allowed timeframe for the Shortcut Method. So Jim will need to calculate his expenses using either the Fixed-Rate Method or Actual Expense Method explained further below.

From 1 March to 30 June 2020, however, Jim can use the Shortcut Method to calculate his expenses if he wishes. Alternatively, he can choose to calculate his expenses, using just one of the below methods for the whole period 1 July 2019 to 30 June 2020.

For illustration’s sake, let’s say Jim decides to use the shortcut method to work out his claim for the period between 1 March and 30 June 2020. He determined he spent 200 hours working from home during this time, so his claim for this period would be $160, calculated accordingly:

200 * $0.80 = $160

Fixed-Rate Method.

 

The Fixed-Rate Method can be used to calculate your expenses where you have a dedicated room, study or home office in which you work (Option A above).

The Fixed-Rate Method provides a fixed hourly rate of 52 cents/hour to compensate you for:

  • Electricity and gas for heating, cooling and lighting
  • Depreciable furniture such as desks and chairs
  • Repairs to equipment, furniture and furnishings

 

What do you need to do?

 

  • Keep a timesheet or diary:
    – of your actual hours spent working at home for the year; OR
    – for a representative four-week period to show your usual pattern of working at home.
  • Keep itemised phone accounts from which you can identify work-related calls.

 

How do you calculate your claim?

 

If you’ve kept a diary of actual hours worked for the year from home, multiply the number of hours you’ve worked by $0.52.

Actual hrs for the year * $0.52 = deductible amount

If you’ve kept a diary for 4 weeks that can be used to establish your pattern of work, multiply your average hours per week by the number of weeks worked in a year and again by $0.52.

(Average hrs per week * number of weeks worked per year) * $0.52 = deductible amount

Fixed-Rate Method: Let’s revisit Jim’s situation.

 

Jim keeps a diary for 4 weeks and calculates that he works on average 10 hours a week from home. Jim also takes 4 weeks of holidays every year. He works out his claim will be $249.60.

(10*48) * $0.52 = $249.60

Actual Expenses Method.

 

Heating, cooling and keeping the lights on in our homes is expensive. When we work from home, even more so. The great news is you can get a tax deduction for your work-related portion of these costs.

This method can be used to calculate your expenses whether or not you have a dedicated space in which to work (Option A or Option B above).

It allows you to claim the actual expenses incurred for running your home office or working from a make-shift work area in your home.

 

What do you need to do?

 

  • Keep a timesheet or diary.
  • Keep copies of your bills for the year.
  • Keep itemised phone accounts from which you can identify work-related calls.
  • Keep receipts or other written evidence, including for depreciating assets you have purchased.
  • Keep diary entries to record your small expenses ($10 or less) totalling no more than $200, or expenses for which you cannot get any kind of evidence.

 

How do you calculate your claim?

 

If you have a dedicated work area.

To calculate your deductible running expenses, first work out how many square metres your study or dedicated office room takes up of the house, divide this number by the total square metres of your house. You now have your deductible %.

Office m2 / total home m2 = deductible %

Next you need to add up all of your electricity and gas bills incurred during the year and then multiply the total by the deductible percentage.

total bills * deductible % = deductible amount

You will need to apportion this claim to exclude any private use of your home office. Check in with your tax advisor to ensure your apportionment is correct.

 

If you do not have a dedicated work area.

If you do not have a dedicated work area, you can calculate your deductible running expenses for individual appliances, equipment or lighting used for work purposes. To do this, you will need to work out the following:

  • power usage / average units used per hour – this is the power consumption per kilowatt hour (kW/h for each appliance, piece of equipment or light used.
  • the cost per kilowatt of power used (kW) – refer to your utility bill for this information.
  • the percentage of time the appliance, equipment or light is used for work-related purposes.
  • total hours worked from home during the year – refer to your timesheet record or your diary for this information.

Once this information is known, multiply the percentage of time the appliance/unit is used for work-related purposes by your total hours you worked from home during the year. Multiply the result by the number of appliances/units of the same type (e.g. 3 light bulbs or 1 fan) to reveal your total adjusted hours for the appliance/unit(s).

(% of work-related use * total WFH hours per year) * number of units = adjusted hours

Then find the cost to run the appliance by multiplying the power usage for the appliance/unit (i.e. the kW/h to run) by the cost per kilowatt of power from your utility bill. Multiply the result by your adjusted hours to get your claim amount.

(Power usage * cost per kilowatt kW) * adjusted hours = claim amount

Please note, the ATO stresses that “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.”

If you need assistance with this, it’s wise to speak to a professional.

Actual Expenses Method: Let’s revisit Jim’s situation.

 

Where Jim has a dedicated work area.

Jim’s apartment is 65 square metres and his converted second bedroom being used as a work space is 10.8 square metres. His bills were $2376.06 for the year.

Jim’s deductible amount for running expenses would be $394.79, calculated as such:

2376.06 * (10.8 m2 / 65 m2) = $394.79

 

Where Jim does not have a dedicated work area.

Tahlia misses Jim and moves back in. Jim now works from the dining room table to allow Tahlia to use the spare room as her bedroom. It is now summer, and the weather is hot so Jim buys a fan to keep him cool while working. Although Jim bought the fan to use while working he only uses it 80% while he is working and the rest of the time for leisure. During winter he uses the heater in the dining room. The heater is mainly used during meals therefore Jim only allocated 10% of its use to working.

Jim calculates his deduction as follows:

Kearney Group - WFH Deduction Case Study - Actual Expense Method Calculations

Step 5: Determine what else you can claim.

Beyond your running costs, what else can you claim?

The table below lists some of the other work-related expenses you may be able to claim when working from home. This table is illustrative only and is not exhaustive. It is important to remember that for assets such as furniture and electronics that cost more than $300 per item, a deduction is claimed over a number of years known as decline in value (depreciation). To work out how much you can claim each year, refer to the ATO depreciation calculator.

Kearney Group - Table: Common Working From Home WFH Tax Deductions Chart ABBREVIATED

FAQ about other expenses and tax deductions.

 

Can I claim for cleaning services?

If you have a dedicated home office, you’re able to claim for the work-related portion of your cleaning costs if you claim using the Actual Expenses Method.

 

Can I claim my occupancy expenses (rent, rates and mortgage payments)?

We often get asked if rent, rates or mortgage payments are claimable. And the answer is – sometimes but we’d suggest only if you’ve gotten advice from a professional.

Whether occupancy expenses are claimable really comes down to whether you rent or own.

If you are renting your home and have a dedicated home office or work area within it, you are able to claim a percentage of your rent based on the number of rooms in your property. For example, if you have 5 rooms in your home (including the kitchen and bathroom), and one of those rooms is your dedicated work area, you can claim 20% of your rent as an expense.

If you own your property, however, claiming mortgage repayments is unwise as it can trigger Capital Gains Tax.

 

Can I claim for household items?

You should not try to claim for coffee, tea, milk and other household items your employer may have otherwise provided for you at your usual place of work.

 

Can I claim costs related to my children, their education or homeschooling?

Coronavirus and related lockdowns have resulted in enormous upheaval for families around the world. Whilst many of us have had to reconfigure our work spaces and purchase equipment and supplies for children being schooled from home, expenses related to children and their education are not claimable. This includes furniture (like desks and shelving), equipment (like computers and tablets) and materials (like paper, pens and other consumables).

 

What if I was required to work in an office or workplace during coronavirus? Is anything special covered? Can I claim a tax deduction for personal protective equipment?

If you were required to work from your usual office or workplace during coronavirus and needed to purchase additional clothing or equipment for your health and safety, you can claim this as a tax deduction.

For example, if you were required to buy your own personal protective equipment (PPE) like gloves, masks or gowns, these would be claimable. If you’ve received an allowance for the purchase or cleaning of occupation-specific clothing or equipment from your employer, you need to disclose this as income on your tax return.

 

Step 6: Add your deductions to your tax return.

Once you’ve worked out your claim, input your claim amount at item D5 in your tax return under “Other work related deductions”.

 

Step 7: Get ready to lodge your tax return.

If you’ve decided to complete and self-lodge your tax return, you will need to submit it to the ATO by 31 October 2020.

If you plan on working with a tax accountant, you’ll get more time to lodge but you do need to have engaged the accountant’s services before 31 October 2020 to be included on their lodgement list.

If your needs are pretty simple, lodging your own tax return is definitely possible. The big question is whether actually doing it is a smart use of your time, and how you’ll be sure you won’t miss important opportunities to improve your tax position.

Moreover, if learning about your money (beyond tax) is important to you, it’s probably worthwhile investing in your relationship with a professional adviser.

We’d always recommend seeking the assistance of an accountant if you:

  • are wondering what else you could or should be doing with your money.
  • want certainty you’ve included all possible deductions and considered your tax strategically.
  • need to lodge tax returns for multiple years.
  • have several different types of income for the year. For example, it’s possible to have gotten your usual salary, JobKeeper, a redundancy, JobSeeker and received income protection payouts – just in the course of this past year, as a result of COVID. Each of these income sources are subject to different terms, reporting requirements and tax. So keep that in mind.
  • may find it difficult to pay your tax bill or wish to discuss a payment plan with the ATO.
  • need or would like someone to advocate for you with the ATO.

We’re here.

If you’re looking for support, we’re here for you.

Speak to the team.