Work from home tax deductions
Due to COVID-19, a huge increase in people have made the switch to working from home. Many of our own staff are among them. In fact as I write this, I too sit in the new home office I created for myself a few weeks ago.
But now that we’re paying to use our own internet, phone and power – plus, in some cases, our own equipment and furniture, it’s definitely time to re-visit the subject of work from home tax deductions.
In general, home office expenses are split into two broad types: home office running expenses and home office occupancy expenses.
Home Office Running Expenses
These are general home office running expenses and include:
- the cost of using a room (power costs for heating, cooling and lighting)
- business related phone costs
- the decline in value of plant and equipment (computer, printer, scanner etc.)
- the decline in value of furniture and furnishings (Tables, chairs, curtains/blinds, floor coverings, light fittings etc.)
- the cost of repairs to furniture and furnishing used for your work
- cleaning costs
You can claim running expenses in two ways;
- At the ATO set rate of per hour, or
- The amount of actual expense you incurred through an established pattern of use.
ATO set rate – cents per hour
This simple calculation can help you quickly work out what you can claim as running expenses on your tax return. It is a nominal rate set by the ATO to cover all home office expenses, rather than claiming them individually.
Running expenses are calculated at a nominal rate of $0.52 per hour you work at home. From March-June 2020 the ATO have increased this rate to $0.80 per hour.
Under the new $0.80 per hour guidelines the ATO have removed the requirement to have a separate or dedicated area at home set aside for working. Otherwise you cannot claim home office expenses on your tax return unless you actually have a home office. A home office is a designated room or area in your home set aside just for work that is not shared by other people.
Pattern of use
If you wish to claim the actual costs incurred from working at home you need to keep a record which shows your pattern of use.
The ATO accepts a diary that notes the day and time that you used your home office for work. Your diary should be kept for at least four weeks in a financial year. You can then apportion all of your associated expenses to claim a portion of your power, heating, cooling, cleaning, furniture etc.
Choose a monthly account statement for a month where your work-related calls or internet usage on your personal mobile phone or internet bill were a typical example of your usual number of work-related calls.
Then, complete the following steps:
- Count the total number of calls or downloads that you made (both work and personal)
- Count the number of calls or downloaded data that were work-related
- Calculate the percentage of work-related calls or internet use (divide the number of work usage by the total number of usage, and multiply the result by 100)
- Calculate the percentage of work related calls in dollar terms against your total monthly bill.
- Multiply by 12 (months) to work out your yearly claim to add to your tax return
This method generally leads to a bigger claim that the cents per hour method but is more complicated. Chat to your tax agent to see which method is best for you.
Generally occupancy expenses are relevant only to those using their home as a place of business.
However, if your employer does not provide you with a work-space and you can provide evidence that your home is your primary place of work, you can claim the relative percentage of the overall occupancy expenses of your home – as well as the running costs of your home office.
To work out how much you can claim you need to work out what percentage of the floor area of your entire home is taken up by your home office. So, if your home office takes up 20% of your home, you can claim 20% of your occupancy expenses.
These occupancy expenses can include:
- Mortgage interest
- House insurance
In order to claim occupancy expenses, you must have a place of business.
If you plan to claim a deduction on the interest you pay on your mortgage, the area you declare as your home office/place of business must have the ‘character’ of a place of business. It should meet the criteria, outlined by the ATO:
- clearly identifiable as a place of business, for example, you have a sign identifying your business at the front of your house
- not readily suitable or adaptable for private or domestic purposes
- used exclusively or almost exclusively for carrying on your business
- used regularly for visits by your clients.
Please be aware that if you claim occupancy home office expenses, it will affect your ability claim a “main residence exemption” for capital gains tax purposes for 100% of your property. This could leave you having to pay a portion of capital gains tax on your family home when you sell it.