We are all currently travelling together in unchartered waters that are very challenging, unnerving and confusing. Many of you may find yourselves working out of home rather than continuing your normal habit of going to your place of employment, so this month’s column will be a refresher on how to ensure you maximize your tax deductions for the costs of working from home you will incur.
If you take the trouble to set up a dedicated, furnished and properly equipped home study, there will be significant tax deductions available for you to claim and therefor reduce your taxable income.
There are three basic requirements to be satisfied in order to claim costs incurred whilst working from home:
- The costs must have been incurred, therefore you must have evidence of the amount and nature of the expenditure incurred such as invoices, receipts, credit card statements, diary entries etc.
- The costs must have been incurred as a consequence of your employment and work related activities.
- In the case of expenses that are both work related and of a private or domestic nature you must have a record showing how the work related portion was determined.
Home Office Expenses
The home office expenses you may be able to claim include home office running expenses, phone and internet expenses and in some cases a share of your occupancy costs, providing you have a dedicated work area such as a properly equipped study and not just a dual purpose area in your lounge or dining room.
The running expenses you may claim include:
- Heating, cooling and lighting
- Cleaning costs
- Repairs to home office equipment and furniture
- Purchase cost of office equipment such as computers, scanners, printers and telephones if less than $300 per item
- Depreciation of the above items if their cost is $300 or more
- Other office costs including computer consumables such as printer paper and ink cartridges, computer software and stationery items etc.
If you do not have a dedicated room or area set aside as a study then you cannot claim the costs of heating, cooling, lighting and cleaning costs or the costs of furniture. You can however still claim work-related phone and internet costs and the work related portion of the purchase cost of and repairs to your computer and printer and related consumables and stationery items.
There are two methods you may use to calculate your running expenses.
The fixed rate per hour method
Instead of recording all of your actual expenses for heating, cooling, lighting and furniture depreciation, you can claim a deduction of 52 cents for each hour you work at home. This is determined by the ATO to be an average of the energy costs and the value of common furniture items used in a dedicated home study.
To claim using this method you will need to keep records of your actual hours spent working at home for the financial year, or alternatively keep a diary for a representative four-week period to reflect your usual pattern of time working at home. You need to separately calculate the other running expenses set out in the list above.
If you have changed the pattern of time spent working at home due to the impact of the COVID-19, and you have earlier in the financial year spent some limited work related time at home it would be preferable to split your record of hours worked into two separate calculations.
The Actual Expenses Method
This method may be used as an alternative to claiming 52 cents per hour for lighting, heating, cooling and cleaning. You will need to work out the floor area of the part of your home that is used exclusively for work purposes as a percentage of the total floor area. Then work out the percentage of the year you have used your dedicated work area or study exclusively for work purposes after allowing for days in the year the work area was not utilised such as illness and holidays and then apply the reduced percentage to the amount of each of the above running costs.
Example: Annual electricity cost is $5,600, the study area as a proportion of total floor area is .12. Total weeks the study was used for work purposes after allowing for 4 weeks holidays = 48/52 = .92. Therefore the deductible proportion of the annual electricity bill claimed would be (5600 *.12)*.92 = $618.
It may well be that the actual expenses method may result in a greater deduction for the above running costs than the amount resulting from using the fixed rate of 52 cents for each hour worked. This could well be the case during the period you are working at home as a consequence of the impact of the COVID-19 on your work location.
It could be well worth retaining and analyzing all your electricity, gas and cleaning costs for the 2020 financial year if you are working from home either on a part- time or full-time basis.
Claiming Occupancy Expenses
Occupancy expenses include rent, mortgage interest, property insurance, land taxes and rates.
Employees generally are normally unable to claim the work related portion of the above occupancy expenses except in the following two very limited circumstances:
a) The space in the home is a place of business and not suitable for domestic use such as a doctor or dentist surgery, hairdresser or artist’s studio etc.
b) No other work location is provided to an employee by an employer and the employee is required to dedicate part of their home to their employer’s business as an office.
Under the current extraordinary circumstances where employees are not able to work at their employer’s business due to either closure of the business premises or a direction to isolate and work at home, it should be possible to satisfy requirement (b) above and claim a floor area based percentage of the above mentioned occupancy costs.
If you are renting your home then you can claim an appropriate percentage of your rent based on the floor area utilized by your dedicated home study area. This deduction is not available if your work area is part of a common area such as a dining or lounge area.
There is a twist however if you are a homeowner.
If you own your home and elect to claim a portion of the above occupancy expenses, you will have a partial exposure to capital gains tax based on the period of time you claimed occupancy expenses as a percentage of the total period you have owned your home up to the time of sale multiplied by the percentage floor area of your study area to the total floor area of your home.
If you envisage having to work from home or expect down the track to spend a significant amount of work time at home, you should consider setting up a fully equipped dedicated work place in a separate room as there are significant tax benefits available rather than working in a shared room such as a lounge or dining room.
This is a real winner if you are renting your home and have a spare room as you can then claim a proportion of your rent as an occupancy expense.
If you own your home and have a dedicated study room, you should do your sums and work out whether you are better off using the easier fixed rate method of claiming running expenses using the 52 cents per hour short cut method or the actual cost method of claiming an appropriate share of your actual running costs being your lighting, heating, cooling and cleaning costs.
If you are in the situation where you have no choice other than to work from home then you also need to consider the potential cost of the CGT liability you may trigger when you sell your home against the significant tax savings you may achieve by claiming an appropriate share of your occupancy costs which can be quite significant, especially if you have a large mortgage on your home.
The content of this article is not intended to be relied upon as professional advice and should not be used as such. If you have any questions you should consult a registered tax agent. Further information on claiming work related expenses and the COVID-19 Government Assistance to Business and Individuals updated to 24th March 2020 is available on our website.
Brian Spurrell FCPA, CTA, Registered Tax Agent.
Director, Personalised Taxation & Accounting Services Pty Ltd
P O Box 143 Warrandyte 3113. Ph: 0412 011 946
Web: www.ptasaccountants .com.au