Workers have long been able to claim certain expenses in relation to working from home. The sudden rise in the number of people working from home after the onset of the Covid-19 pandemic, saw the ATO came up with a simplified method of making a tax deduction for these expenses to make everyone’s lives easier. The ‘Shortcut Method’ gave a simple hourly rate workers could use without the need for some of the more stringent record-keeping requirements normally associated with claiming a deduction for expenses incurred with working from home. This method was, however, scrapped by the ATO in early 2023 and the more stringent record-keeping requirements now needed to claim working from home expenses is catching many people out.
So how do I know what I can claim?
Working from home expenses are broken into two categories:
Running Expenses
Occupancy Expenses
Generally speaking, anyone that is an employee can only claim deductions that are related to Running Expenses. That means that in most circumstances employees are unable to make a deduction for Occupancy Expenses when it comes to working from home. So, what’s the difference.
Running Expenses
As the name suggests, these are the expenses associated with the running of your home and the facilities within it. Think of things like your home phone and internet, personal mobile phone, stationery, desks, monitors and electricity.
Usually these expenses are incurred as part of day-to-day life and are therefore private in nature, however, you are able to claim a deduction where there is additional costs relating to you working from home. For example, your internet usage would increase when you’re logging onto work from home rather than being in the office. Or you might have had to go out and buy that new monitor because the screen on your work laptop just wasn’t cutting it.
There are two different methods for making a deduction for work from home expenses:
Fixed Rate Method – This method allows you to make a deduction based on an hourly rate derived by the ATO (for 2023-24 it was $0.67/hr) multiplied by the number of hours you worked from home. While you do not need to keep receipts of all the actual expenses you incurred, you must be able to prove you incurred the expenditure (eg have at least one bill of each expense). You must also have records to substantiate the hours your worked from home (eg timesheets or diary entries). You cannot just make an approximation of the number of hours you worked from home.
This method covers the following expenditure:
Data and internet
Mobile and home phone usage
Electricity and gas
Computer consumables (paper, printer ink etc)
Stationery
You therefore cannot use the Fixed Rate Method AND also make a claim for the actual expenditure for these items.
In addition to the hourly rate, you can make an actual claim for the decline in value of depreciable items (eg computers, monitors, desks etc) as long as you have the receipt.
Actual Cost Method – This allows a deduction for the actual expense incurred in working from home. The record keeping required for this method is much more rigorous as it requires you to keep all receipts for expenditure incurred as well as detailed calculations of how you determine the work-related component. For example, if you were claiming a portion of your internet bill, you would need to keep all internet bills and show how you calculated the amount of data utilised for work compared to the amount used for personal use (the ATO will allow a one-month period for this to be extrapolated across the whole year). An estimate or ‘best guess’ will not be sufficient.
Occupancy Expenses
Occupancy expenses are those expenses you incur to occupy your residence. These include:
mortgage interest
rent
council and water rates
land taxes
house insurance premiums
You can only make a claim for these expenses where you have a dedicated space that is setup as a home office and is a ‘place of business’ in character. This may be identified by:
The area is clearly identified as a place of business
The area isn’t readily capable of being used for private purposes
The area is exclusively (or almost exclusively) used for carrying on a business
The area is used regularly for visits of clients or customers
Generally speaking, employees cannot claim any occupancy expenses. The circumstances in which you may be able to claim occupancy expenses as an employee are:
the nature of your income earning activities requires you to have a place of business
it was necessary for you to work from home because your employer doesn't provide you with an alternative place of business
the area of your home that you use for work is exclusively or almost exclusively used for work purposes and isn't readily capable of being used for any other purpose.
To make a claim for occupancy expenses you must be able to reliably measure the portion of your house that is utilised as a home office. The easiest way to do this is to work out the square meterage of your office space as a proportion of the square meterage of your residence (yes, that might mean trying to find floor plans with measurements). For example, if your home office was 9m2 and your total residence was 180m2, you could claim 5% (9 divided by 180) of your occupancy related expenses as a deduction.
If you own your own home (either outright or through a mortgage) you must think very carefully about making a tax deduction claim for occupancy expenses. This is because the portion of your house that you are claiming as a home office is then subject to capital gains tax (CGT) when you sell it. Usually, the selling of a private residence is not subject to CGT. In many circumstances the potential extra tax from CGT outweighs the benefit of the deduction claims in relation to occupancy expenses, however, everyone’s situation is different. It is best to consult with a registered tax agent for advice.
At the end of the day, no matter what method you use or what you make a claim for, record-keeping is key. This is the first thing the ATO will ask for if they ever come knocking.
If ever you’re not sure, talk to a tax agent like us.
Comments