With COVID-19 still on it’s nasty rampage and a large majority of employees working from home, there are some benefits with keeping records about your home office expenses so you can claim them as a tax deduction. Yep, I get it, claiming home office expenses in tax returns is probably not high on the list of priorities for some right now, but, for others every little bit counts and it is important to get it right.
If this is something you have always wanted to know about please read on!
The existing calculation methods are fairly complex, particularly the actual cost method, so between 1 March 2020 and at least 30 June 2020 the ATO have put into place a COVID-19 variation to simplify the existing rules so I will outline the shortcut method as well.
Can you claim a deduction?
This is pretty straight forward. There are three tests:
- You must have spent the money
- It must be related to earning you income
- You must have the records to prove it
Clearly you cannot claim a deduction if you have been reimbursed by your employer.
If you have received an allowance from your employer then:
- You must include that allowance as income in your tax return, and
- Claim a deduction as outlined on this page
What expenses can I claim?
Okay so you have got through the first hurdle but lets now look at what you can claim. This is about the additional running costs you incur because you are running a home office. There are essentially three categories of expenses to consider:
- running expenses;
- occupancy expenses; and
- phone and internet expenses.
In detail these are:
- electricity expenses associated with heating, cooling and lighting the area from which you are working and running items you are using for work
- cleaning costs for a dedicated work area
- phone and internet expenses
- computer consumables (for example, printer paper and ink) and stationery
- home office equipment, including computers, printers, phones, furniture and furnishings – you can claim either the
- full cost of items up to $300
- decline in value for items over $300
What expenses can’t I claim?
You cannot claim
- occupancy expenses such as mortgage interest, rent and rates, and
If you are working from home only due to COVID-19, you can’t claim:
- the cost of coffee, tea, milk and other general household items your employer may otherwise have provided you with at work.
Taxpayers working from home are entitled to deductions for part of the expenses incurred in their use of the home office. There are 3 approaches you can use to calculate home office deductions.
- The COVID-19 Shortcut method
- The fixed rate method,
- the actual method
The COVID-19 Shortcut method
You can claim a deduction of 80 cents for each hour you work from home due to COVID-19 as long as you are:
- working from home to fulfil your employment duties and not just carrying out minimal tasks such as occasionally checking emails or taking calls
- incurring additional deductible running expenses as a result of working from home.
You do not have to have a separate or dedicated area of your home set aside for working, such as a private study.
The shortcut method rate covers all deductible running expenses
You must keep a record of the number of hours you have worked from home as a result of COVID-19. Examples are timesheets, diary notes or rosters.
If you use the shortcut method to claim a deduction and you lodge your 2019–20 tax return through myGov or a tax agent, you must include the note ‘COVID-hourly rate’ in your tax return.
Fixed Rate Method
The fixed rate method involves the taxpayer using a fixed rate of 52 cents per hour for each hour they work from home. This rate encompasses heating, cooling, lighting, cleaning and the decline in value of office furniture.
- Additionally, the taxpayer can claim 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.
When using this method, it’s recommended the taxpayer keeps a diary for at least four weeks in a financial year that outlines hours spent working from the home office.
Actual Cost Method
This is where things start getting complex, but, if you have a high attention to detail and love to maximize your potential tax deduction then it could be worth your while keeping detailed records so read on! The process for using the actual method to calculate the running expenses will differ depending on whether a designated work area is maintained – that is, if you have a dedicated home office area – or not.
Designated work area is maintained for employment duties
- Begin by calculating the total expenses incurred for electricity / gas and cleaning;
- Calculate the floor area of the home office area as a percentage of the total floor area of the home;
- Calculate the percentage of the year that area of the home was used exclusively for work, ensuring you adjust for any private usage of the work area;
- Multiply the total expenses incurred for electricity / gas and cleaning by the floor area percentage and the percentage of the year it was used exclusively for work purposes; and
- Calculate the decline in value of any equipment, furniture or fixtures in the home office and multiply this amount by the work-related use.
- The sum total of the above is the total deductible running expenses that the taxpayer is able to claim when a dedicated home office is maintained.
Designated work area is not maintained for employment duties
- When a designated work area is not maintained (e.g if you are simply roaming with a laptop), you must determine the cost per hour of electricity / gas for lights, heating and cooling in the areas where you are working.
- Next, you need to multiply the cost per hour by the number of hours spent working from home.
- Remember, when your work is completed in shared spaces, for example a dining room, or a lounge room where other family members regularly occupy, only the costs associated directly with operating a laptop or other specific equipment for work purposes is able to be claimed.
- You are also able to calculate the decline in value of equipment specifically used for work purposes, apportioned for the time spent using it whilst working.
Income tax deductions and occupancy expenses
An employee of a business who is working from home is unable to claim deductions for proportions of occupancy expenses incurred, including rent, mortgage interest, land taxes and rates (sorry to break it to you).
Income tax deductions available for phone and internet expenses
Two different methods can be used when calculating the deductions available for phone and internet expenses incurred whilst working from home. These methods are explained below.
Calculation of phone and internet expenses using the limited documentation method
A claim up to $50 can be made when using the limited documentation method by using the following rates: $0.10 for text messages sent from a mobile phone, $0.25 for work calls made from a landline phone; and $0.75 for work calls made from a mobile phone.
Calculation of phone and internet expenses using the actual expenses method
If the costs for your phone and internet costs are likely to be greater than $50, the actual expenses method should be applied in order to calculate the total deduction available. The steps to this method are as follows:
First, calculate the percentage of work use of the phone and internet over a four-week period on a reasonable basis. A reasonable basis could include: the number of work calls made as a percentage of total calls, the amount of time spent on work calls as a percentage of total calls and the amount of data downloaded for work purposes as a percentage of your total downloads.
Then apply this percentage to phone and internet bills received to calculate the deductible work-related portion.
Records you must keep
If you use the shortcut method, you only need to keep a record of the hours you worked at home, for example timesheets or diary notes.
If you use the other methods, you must also keep a record of the number of hours you worked from home along with records of your expenses. For more information on what those records are see Home office expenses.
5ivestar Business Services are tax agents located in Carina Heights on Brisbane’s Southside. We service all areas of Brisbane, Ipswich and the Sunshine Coast for tax, BAS and bookkeeping. We also practice as virtual CFOs, take on interim CFO engagements as well and financial management, reengineering and restructures including business turnarounds and transformations and expert financial modelling.
If you need assistance or further advice on how to claim home office expenses in your tax return, don’t hesitate to get in touch with our friendly team below.
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