Director Bishop Collins Accountants
Working from home deductions
We’ve had a lot of interest from our clients recently requesting support on what deductions are available when working from home. The impact of COVID-19 on people working from home has been significant. If you are working from home, you’ll be incurring additional costs and it’s important you accurately capture these to ensure you’re not paying too much tax.
What Can I claim when I am working from home?
What you can claim as a deduction working from home will primarily depend on whether you are an employee working from home OR you are running your business from home.
I’m just working from home
If you’re just working from home and not operating a small business from home, your deductions will generally be limited to running expenses. The following is a summary of deductions you may be able to claim:
|Deductions you may be able to claim||You have a dedicated work area||You don’t have a dedicated work area|
|Using a room’s utilities such as gas and electricity||Yes||Yes|
|Work-related telephone costs||Yes||Yes|
|Depreciation of office plant and equipment such as desks, chairs and computers||Yes||Yes|
|Depreciation of curtains, carpets, light and other fittings||Yes||No|
|Occupancy expenses such as rent, mortgage, interest, insurance and rates||No||No|
What if I’m running my small business from home?
If you’re running your small business from home, in addition to claiming running expenses you can also claim occupancy expenses. Occupancy expenses include anything you pay to own or rent your home, such as:
- Mortgage interest or rent
- Rates and taxes
- House and contents insurance
You can only claim occupancy expenses if an area of your home is dedicated to running your business: This means you need to meet the following requirements:
|· Clearly identifiable as a place of business||· Used exclusively or almost exclusively for your business|
|· Not easily suitable or adaptable for private or domestic use||· Used regularly for business visits by your clients|
How do I calculate my working from home expenses?
A common method for calculating occupancy expenses is to use the floor area you use for your home office as a proportion of the floor area of your whole home.
As with calculating occupancy costs, you can also use a floorplan to allocate the proportion of running expenses between private and business use.
If you don’t have a dedicated workspace and the floor plan isn’t appropriate other methods are available to calculate your deductions. For example, you might be able to compare your power bills from before you began operating your business to after you commenced operating.
In addition to this, you can keep a diary showing your business use for a representative 4-week period each financial year to work out a pattern of use. When averaging this out remember to allow for holidays. You can then claim a deduction of the ATO’s rate per hour based on actual use or an established pattern of use.
In summary, you can use one of 2 calculation methods
- Fixed-rate method – This is 52 cents for each hour you work from home. This method does not include the following expenses which you will need to calculate separately
- Phone and internet
- Consumables and deprecation of equipment
- Actual costs method – As the name suggests you keep a record of the actual costs incurred to work or operate your business from home.
I’m only working from home due to COVID-19
To support taxpayers in this situation the ATO has introduced a shortcut method which provides a simple way to calculate these expenses with minimal record-keeping requirements. This shortcut method applies from 1 March 2020 and can be applied up to 30 June 2021.
Using the shortcut method, you can claim a deduction of 80 cents for each hour you worked from home for the period between:
- 1 March 2020 to 30 June 2020 in your 2019–20 tax return
- 1 July 2020 to 30 June 2021 in your 2020–21 tax return.
- Were working from home to fulfill your employment duties and not just carrying out minimal tasks such as occasionally checking emails or taking calls
- Incurred additional running expenses as a result of working from home.
The shortcut method doesn’t require you to have a dedicated work area and covers all additional deductible running expenses.
What are my record-keeping requirements when working from home?
You will need to keep appropriate records to substantiate your claims for all your running and occupancy expenses. This will depend on the method you use to claim your expenses, written evidence may include:
|· Written diary including hours usage or explain floor space allocation and measurements||· Rental contract between homeowner and business (occupancy expenses)|
|· Mortgage interest, rent, insurance and council rates (occupancy expenses)||· Receipts for purchase and repairs of office equipment and invoices for utility bills|
When I sell my home do I have to pay CGT if I claim home office expenses?
CGT generally will not apply when you sell your home. However, if you used any part of your home for business purposes, you may have to pay CGT.
You will generally only have to pay CGT for periods when you used your home for your business. For example, if you owned your home for 10 years but only used it for business for 3 years then you will only need to calculate capital gains tax for the 3-year period. The amount of taxable capital gain will usually be calculated using the same proportional method you used to calculate your deduction for occupancy expenses.
CGT won’t be payable if any of the following apply:
- You only claimed running expenses as an employee.
- You operated a business from home, but you didn’t have a dedicated area set aside.
- Your business was operated through a company or trust.
In addition to this, you may be able to apply one or more of the small business CGT concessions to reduce your taxable capital gain.
If you have any questions in regard to claiming home office-related expenses, please call us on 4353 2333