Claiming Home Office Expenses - COVID-19

May 25, 2020

ATO announces simpler method for
claiming home office running costs

With the introduction of new work arrangements arising from the government measures surrounding COVID-19, there maybe many of you, your family, friends, colleagues and/or community that are now working from home for an indefinite period of time - and whether for some, part or all of your usual work hours.

If so, you maybe eligible to claim expenses incurred in working from your home. However this will depend on whether your employer is supplying the equipment you need to perform your job and / or reimbursing you for some or any of the expenses you have incurred in doing so. In which case, if the employer is reimbursing you, then it would be the employer or business that would be claiming the expense or deduction on their tax return rather than than you claiming on your personal tax return.

However if you have expenses you incur for working from home then it would be essential for you to start keeping records of this if you intend to claim on your future tax return.   Noting that an essential key is to ensure any expenses claimed are apportioned between personal and work/business costs for working from home.
 

ATO announces short cut method for claiming home office running expenses

 

The Australian Taxation Office (‘ATO’) have announced a temporary simplified short cut method to make it easier for individual taxpayers to claim deductions for additional running expenses incurred (e.g. additional heating, cooling and lighting costs), as a result of working from home due to the government measures put in place in response to the Coronavirus pandemic. 

 

The ATO will allow individuals to claim a deduction for all running (operating) expenses incurred during the period 1 March 2020 to 30 June 2020, based on a rate of 80 cents for each hour an individual carries out genuine work duties from home. This is an alternative method to claiming home running expenses under existing arrangements, which generally require an analysis of specific running expenses incurred and more onerous record-keeping.

 

https://www.ato.gov.au/General/COVID-19/Support-for-individuals-and-employees/Employees-working-from-home/ 


WORKING FROM HOME -  Deductibility Criteria 

 

To claim a deduction for working from home, all of the following would need to apply:

  • You must have spent the money.

  • The expense must be directly related to earning your income.

  • You must have a record to prove it.

This means you cannot claim a deduction for items provided by your employer or if you have been reimbursed for the expense.

 

If you are not reimbursed by your employer, but instead receive an allowance from them to cover your expenses when you work from home, you:

  • would include this allowance as income in your tax return.

  • can claim a deduction as outlined in this fact sheet.

To highlight the point about reimbursement, if it occurs, could take one of 2 forms –

  1. the employer might simply transfer the actual amount to the employee, in which case there would be no assessable income and no deduction, effectively a non-event as far as tax is concerned;

  2. alternatively, the employer might give the employee a lump sum allowance to cover the agreed deductible expenses, in which case the employee would return the allowance as income and claim a deduction using the principles set out below. In other words, if the allowance is more than the actual expenses, the difference is taxable income.


ATO’s 80 CENTS PER HOUR METHOD COVERS ALL RUNNING COSTS

 

The 80 cents per hour method is designed to cover all deductible running expenses associated with working from home and incurred from 1 March 2020 to 30 June 2020, including the following:

  • Electricity expenses associated with heating, cooling and lighting the area at home which is being used for work.

  • Cleaning costs for a dedicated work area.

  • Phone and internet expenses.

  • Computer consumables e.g. printer paper and ink, stationery.

  • Home office office equipment e.g. a computer, printer, office desk, chair and furniture.  You can claim either the full cost of items up to $300 or the decline in value (depreciation) for items over $300

This means that, under the 80 cents per hour method, separate claims cannot be made for any of the above running expenses (including depreciation of work-related furniture and equipment).

 

Furthermore, according to the ATO’s announcement, under the 80 cents per hour method:

 

(a) there is no requirement to have a separate or dedicated area at home set aside for working (e.g.,a private study);

 

(b) multiple people living in the same house could claim under this method (e.g., a couple living together could each individually claim running expenses they have incurred while genuinely working from home, based on the 80 cents per hour method); and

 

(c) an individual will only be required to keep a record of the number of hours worked from home as a result of the Coronavirus, during the above period. This record can include time sheets, diary entries/notes or even rosters.

For example, if as a result of the COVID-19 issue, 25 hours of a working week is conducted at home for 12 weeks in the year to 30 June 2020, $240 can be claimed as a deduction (25 x 12 x 0.80).


What about other equipment and services needed to work from home?

 

Many employees are working from home for the first time. To facilitate this, equipment and services such as laptops or other mobile devices, webcams , headsets, cloud-based platforms for video and audio conferencing and webinars have been quickly purchased in the last few weeks. 

 

If the employer has paid for any of these items outright or reimbursed the employee for any such expenses incurred, the employee cannot claim any amount and the employer is entitled to the deduction for the expense or the decline in value of the depreciating asset. If the employee has borne the cost without being reimbursed by their employer, they are entitled to claim a deduction to the extent of taxable use, but they must adjust their claim for any private use. 


Occupancy Expenses

 

Generally, occupancy or ownership expenses cannot be claimed by employees.

The ATO have advised that if you are working from home only due to COVID-19, you are not permitted to claim for :

  • occupancy expenses such as mortgage interest, rent, land tax and council rates

  • the cost of coffee, tea, milk and other general household items your employer may otherwise have provided you with at work.

Interest on mortgages, rent, council rates and land tax relate to costs associated with occupying the premises as a whole - as opposed to running costs associated specifically with working from home.

 

The only genuine qualification to this exclusion arises if there is a dedicated area which is dedicated as a workplace. An example would be a doctor’s surgery run from the doctor’s home. However, it can apply in other less clear-cut examples as well.

 

There is a downside to consider: if a claim is made for occupancy or ownership expenses, the capital gains tax  main residence exemption will be compromised. It is not so compromised if only operational (running) expenses are claimed. 
 

OPTIONS FOR CALCULATING & CLAIMING RUNNING COSTS 

 

There are three ways you can choose to calculate your additional running expenses:

  • shortcut method ─ claim a rate of 80 cents per work hour for all additional running expenses

  • fixed rate method ─ claim all of these:

    • a rate of 52 cents per work hour for heating, cooling, lighting, cleaning and the decline in value of office furniture,

    • the work-related portion of your actual costs of phone and internet expenses, computer consumables, stationery, and

    • the work-related portion of the decline in value of a computer, laptop or similar device.

  • actual cost method ─ claim the actual work-related portion of all your running expenses, which you need to calculate on a reasonable basis.

For more information on how to calculate and claim a deduction under the actual cost method or fixed rate method see Home office expenses. This is an invaluable link for any person or business claiming home office expenses as it is very thorough and clear in its detailing of claiming such expenses.


ATO EXISTING Working from Home CLAIM ARRANGEMENTS - Pre 1 March 2020

 

For detailed information on eligibility and how to calculate and claim working from home expenses please refer to this ATO website link  Home office expenses. .  This is an invaluable, detailed and very clear resource for any person or business claiming home office expenses - whether running costs and/or occupancy costs.

Working from home running expenses that are incurred before 1 March 2020 (and/or incurred from this date where an individual does not use the 80 cents per hour method) must be claimed using existing claim arrangements. Broadly, these existing claim arrangements require:

  • an analysis of specific running expenses incurred as a result of working from home; and

  • more onerous record-keeping (e.g., the requirement to provide receipts and similar documents for expenses being claimed, as well as the requirement to maintain a time usage diary or similar record to show how often a home work area was used during the year for work purposes).

In working out what is deductible, it is important to distinguish between two different categories of expenses – operating expenses (sometimes referred to as running costs) and occupancy expenses (sometimes referred as home office expenses).

RUNNING (OPERATING) EXPENSES

 

The work related portion of the following running costs or operating expenses may be legitimately claimed:

  • Electricity expenses associated with heating, cooling and lighting the area at home which is being used for work.

  • Cleaning costs for a dedicated work area.

  • Phone and internet expenses.

  • Computer consumables e.g. printer paper and ink, stationery.

  • Home office office equipment e.g. a computer, printer, office desk, chair and furniture.  You can claim either the full cost of items up to $300 or the decline in value (depreciation) for items over $300


Calculating running expenses
 

There are two ways to calculate your running expenses:

If you are only working from home due to COVID-19, please refer to – Employees working from home.


Apportioning for work and private use 

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.

 

This rate is based on average energy costs and the value of common furniture items used in home business areas.

 

To claim using this method, keep records of either:

  • your actual hours spent working at home for the year

  • a diary for a representative four-week period to show your usual pattern of working at home.

You can then apply the four-week representative period across the remainder of the year to determine your full deduction amount. However, if your work pattern changes you will need to create a new record.

 

You need to separately work out all other home work area expenses, such as:

  • phone and internet expenses

  • computer consumables and stationery

  • decline in value on computers or other equipment.


Actual expenses

 

If you have a dedicated work area, you can claim additional running costs and the decline in value of office furniture used in the area for work purposes.

 

To calculate actual expenses for your dedicated work area, you can:

  • keep a record of the number of actual hours you work from home during the income year

  • keep a diary for a representative four-week period to show your usual pattern of working at home

  • work out the decline in value of depreciating assets and

    • keep receipts showing the amount you spent on the assets

    • work out the percentage of the year you used those depreciating assets exclusively for work – you can claim a deduction for the proportion of the decline in value that reflects your work-related use of the depreciating assets

  • work out the cost of your cleaning expenses by adding together your receipts and multiply it by the floor area of your dedicated work area (floor area of the dedicated work area divided by the whole area of the house as a percentage) – your claim should be apportioned for any

    • private use of your home office

    • use of the home office by other family members

  • work out the cost of your heating, cooling and lighting by working out the following

    • the cost per unit of power used – refer to your utility bill for this information

    • the average units used per hour – this is the power consumption per kilowatt hour for each appliance, equipment or light used

    • the total annual hours used for work-related purposes – refer to your record of hours worked or your diary for this information.

You must also take into account if any other members of your household use the home office and, if so, apportion your expenses accordingly.

 

To claim a deduction for an asset that cost $300 or more, you need to calculate the decline in value for both the period you:

  • owned the assets during the income year

  • used the assets for work-related purposes.

You can use the depreciation and capital allowances tool to calculate your deduction for the decline in value of equipment, furniture and furnishings that cost more than $300, use the depreciation and capital allowances tool to work this out.

 

If you don't have a dedicated work area, you should work out the actual cost of your heating, cooling and electricity expenses. You can do this by working out the cost of running each unit you used per hour and multiplying that by the hours you worked from home. The amount of the additional expense is generally small, especially if there are other people using the area at the same time you are working. In those circumstances, there is no additional cost for lighting, heating or cooling.


Purchase and Depreciation of home office equipment and furniture

In respect to the claiming the purchase of home office equipment, if the amount is less than $300, an immediate deduction for the work-related portion can be claimed; otherwise it must be written off over the effective life of the asset, which is how long you can use the asset for taxable purposes or producing your assessable income.  

 

For most depreciating assets, you have the choice of either working out the effective life yourself or using an effective life determined by the Commissioner.

 

You must make the choice for the income year in which the asset’s start time occurs. Generally, you must make the choice by the time you lodge your income tax return for that year.

 

In respect of depreciation of home office furniture and costs of heating, cooling, lighting and cleaning that exceed the normal household usage, the ATO applies some useful administrative rules so as to allow either a reasonable portion based on a reasonable test of the actual expenses incurred or a flat rate of 52 cents per hour (this rate was lifted in the last 48 hours from 52 cents per hour to 80 cents per hour between 1 March 2020 to 30 June 2020. Refer this link for further details or the first part of this newsletter up-date).

This flat rate includes heating, cooling, lighting, cleaning and the decline in value of furniture, so if using the flat rate, you can’t also claim depreciation on office furniture.

Receipts will be needed together with a detailed explanation of the basis of apportionment such as floor space used for work purposes relative to total work space in the house.

A record can be kept of hours worked from home or a diary should be maintained for at least 4 representative weeks to record the amount of time the home is used for work purposes. For example, 25 hours of a working week is conducted at home for 12 weeks in the year to 30 June 2020, $156 can be claimed as a deduction (25 x 12 x $0.52).

 

This would also apply for telephone, mobile phone and internet usage in that these actual expenses would be required to be apportioned requiring a diary to be kept for a representative 4-week period.  Mobile phone usage is also subject to some administrative short-cuts with a standard $50 fixed deduction per year being allowed. Otherwise, an apportioned deduction based on actual expenses is required based on a diary being kept for a representative 4-week period.    


OCCUPANCY EXPENSES

 

EMPLOYEES claiming a tax deduction for occupancy expenses 

Generally, occupancy or ownership expenses can usually not be claimed by employees.

Occupancy expenses include interest on mortgages, rent, property insurance, council rates and land tax. All such items relate to costs associated with occupying the premises as a whole - as opposed to running costs associated specifically with working from home.

 

The only genuine qualification to this exclusion arises if there is a dedicated area which is dedicated as a workplace. An example would be a doctor’s surgery run from the doctor’s home. 

 

The ATO site two very limited circumstances where you can only claim the work-related proportion of your occupancy expenses in

  • the space in the home is a place of business, and not suitable for domestic use – for example, a doctor or dentist surgery or a hairdresser studio in the home

  • 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 – you can claim the portion of these costs that relate to a clearly identified place of business.

There is a downside to consider is if a claim is made for occupancy or ownership expenses, the capital gains tax main residence exemption will be compromised. It is not so compromised if only operational (running) expenses are claimed. 

    Calculating occupancy expenses

     

    If you are eligible to claim occupancy expenses, you can work them out by calculating the:

     

    Total expenses × floor area × percentage of year that part of your home was used exclusively for work

     

    If the area you use for work takes up 15% of your home and you used it for work for the whole of the year, you can claim 15% of your occupancy expenses.


    HOME-BASED BUSINESS claiming a tax deduction for expenses 

     

    For further information refer this ATO link


    https://www.ato.gov.au/Business/Income-and-deductions-for-business/Deductions/Deductions-for-home-based-business-expenses/?page=5

    If you operate some or all of your business from your home, you may be able to claim tax deductions for home-based business expenses in these categories:

    • occupancy expenses (such as mortgage interest or rent, council rates, land taxes, house insurance premiums)

    • running expenses (such as electricity, phone, decline in value of plant and equipment, cost of repairs to furniture and furnishings, cleaning)

    • the expenses of motor vehicle trips between your home and other places, if the travel is for business purposes.

    For a summary of this content in poster format, see Home-based business expenses (PDF 391KB)This link will download a file.

      If you claim occupancy expenses, you don't qualify for the capital gains tax (CGT) main residence exemption for the part of your home that you use as a place of business there may be CGT implications when you sell it.

       

      It's important to keep the correct records to work out your deductions or Capital Gains tax such as the sale and purchase contracts of the property, settlement statement provided for each of these transactions and any improvement costs on the property.

       

      If you’re entitled to goods and services tax (GST) input tax credits, you must claim your deduction in your income tax return at the GST exclusive amount.

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