COVID-19 | The tax benefits of working from home

Overview

What are the methods for calculating your home office tax deduction?

Prior to 1 March 2020, there were two methods a taxpayer could use to calculate their home office tax deduction:

• the Fixed Rate Method; or
• the Actual Cost Method.

As a result of the COVID-19 pandemic, the Australian Taxation Office (ATO) has introduced a temporary third method called the Shortcut Method which can be used for the period from:

• 1 March 2020 to 30 June 2020 in the 2019–20 income year; and
• 1 July 2020 to 30 September 2020 in the 2020–21 income year.[1]

The ATO may extend this period, depending on when work patterns return to normal.

The Benefits of the Shortcut Method

The Shortcut Method reduces the amount of paperwork and record-keeping required to be maintained by taxpayers. It also allows multiple people living in the same house to claim the new rate.

The requirement to have a dedicated work-from-home area has also been removed.

Home office tax deductions prior to 1 March 2020

It is important to note that claims for home office expenses prior to 1 March 2020 cannot be calculated using the Shortcut Method, and must be calculated using the pre-existing Fixed Rate Method or Actual Cost Method.

Fixed Rate Method

What is the Fixed Rate Method?

The Fixed Rate Method allows you to claim a rate of 52 cents for each hour you work from home for the work-related expenses you incur.

What expenses can be claimed using the Fixed Rate Method?

The Fixed Rate Method covers expenses such as:

• heating;
• cooling;
• lighting;
• cleaning; and
• the decline in value of furniture used.

The Fixed Rate Method does not cover the following expenses:

• telephone;
• internet;
• computer consumables;
• stationery; and
• the decline in value of a computer or similar device.

You will need to calculate the work-related portion of the above expenses, and make a separate claim.

What is the criteria for using the Fixed Rate Method?

In order to claim home office expenses using the Fixed Rate Method, you must satisfy the following requirements:

• keep records of either:
  • your actual hours spent working at home for the year; or
  • a diary for a representative four-week period to show your usual pattern of working at home; or
• have a dedicated work area, such as a study when you work from home.

Actual Cost Method

What is the Actual Cost Method?

The Actual Cost Method allows you to claim the actual work-related portion of all your running expenses, which needs to be calculated on a reasonable basis.

This involves the laborious task of identifying all of the relevant bills and invoices and then apportioning the work versus private use.

What expenses can be claimed using the Actual Cost Method?

The Actual Cost Method covers expenses such as:

• heating;
• cooling;
• lighting;
• cleaning (if you use a dedicated area for working);
• the decline in value of furniture used;
• telephone;
• internet;
• computer consumables and stationery; and
• computer depreciation.

It is important to note that if you do not have a dedicated work area, you will generally only incur minimal additional running expenses. For example, if the area you are working in is a common area of the home such as a lounge room, you will not incur any additional costs for lighting, heating or cooling if other members of your household are also using the lounge room for a non-work related purpose.

What is the criteria for using the Actual Cost Method?

In order to claim home office expenses using the Actual Cost Method, you must be able to calculate the work-related portion of your actual expenses. This requires you to keep a record of the following:

• 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;
• receipts showing the amount you spent on assets; and
• itemised utility bills and phone bills.

Shortcut Method

What is the Shortcut Method?

The Shortcut Method allows you to claim a deduction of 80 cents per hour for all “running expenses”.

It is crucial to remember that the Shortcut Method could only be used from 1 March 2020 to 30 June 2020 for the 2019–20 income year. You will be able to include the period from 1 July 2020 to 30 September 2020 in your tax return for the 2020–21 income year.

What expenses can be claimed using the Shortcut Method?

The Shortcut Method covers expenses such as:

• heating;
• cooling;
• lighting;
• cleaning (if you use a dedicated area for working);
• the decline in value of furniture used;
• telephone;
• internet;
• computer consumables and stationery; and
• computer depreciation.

What is the criteria for using the Shortcut Method?

In order to claim home office expenses using the Shortcut Method, you must satisfy the following conditions:

• you were working from home to fulfil your employment duties and not just carrying out minimal tasks such as occasionally checking emails or taking calls; and
• you incurred additional running expenses as a result of working from home.

In order to use the Shortcut Method, you must also keep a record of the number of hours you have worked from home due to the COVID-19 pandemic.

You do not need a dedicated work area and multiple people living in the same house can claim this new hourly rate.

The Three Golden Rules for Claiming a Tax Deduction for Home Office Expenses

The three golden rules are:

• the taxpayer must have spent the money themselves and not have been reimbursed;
• the claim must be directly related to earning your income; and
• there must be a record to substantiate the claim.

Running a Business from Home

If you incur expenses from running your business from home, you can only claim deductions for the business part of the expense.  You cannot claim deductions for private costs.

Business proprietors can choose which method they use to calculate the appropriate deduction for home office expenses.

Expenses you can claim a deduction for include:

• occupancy expenses, including rent and mortgage interest;
• running expenses, including heating, cooling, lighting, cleaning costs and the decline in value of furniture and equipment used; and
• phone and internet expenses.

Employees or wage earners are precluded from claiming occupancy expenses such as rent and mortgage interest.

Whilst business proprietors are eligible to claim a portion of their occupancy fees, making such a claim can affect the main residence exemption:

• A person’s home is normally exempt from capital gains tax when they sell it, under the ‘main residence exemption’.
• However, you do not get the full main residence exemption if you use any part of your home to produce income. This is in accordance with section 118-190 of the Income Tax Assessment Act 1997 (Cth) (ITAA97). Accordingly, you may only be entitled to a partial exemption if your home is considered your primary place of business. This is ultimately a question of fact.

Which is the Best Method for Claiming a Tax Deduction for Home Office Expenses?

The best method to use will depend on your personal circumstances. There are advantages and disadvantages with each method.

The Shortcut Method can be regarded as the most appealing due its simplicity, but it can only be used for the period from 1 March 2020 to 30 June 2020 for the 2019–20 income year, and the period from 1 July 2020 to 30 September 2020 for the 2020–21 income year.

If you have incurred substantial expenses in purchasing a computer, desk, chair, printer, delivery charges, etc. you may gain an advantage using the Actual Cost Method.

The ATO has provided an example of what the new rules might look like:[2]

“Bianca is an employee who works as a copywriter and editor. Bianca starts working from home on 16 March as a result of COVID-19 and replaces her face-to-face meetings with online video conferencing.

She has just bought a new laptop, desk, chair and stationery. She also wants to claim some additional gas, electricity, phone and internet costs due to working from home.

Under the Shortcut Method, Bianca can now claim all her expenses under a rate of 80 cents per hour. All she needs is her timesheets.

Bianca can also decide to claim using existing working from home calculations. Under that method, Bianca can claim the desk, chair, gas and electricity under the 52 cents per hour, but she would need to work out the decline in value of the laptop, and calculate the work-related portion of the laptop, stationery, phone and internet.”

For details of all our COVID-19 tips and updates, visit the Gadens COVID-19 Hub.

Authored by:

David Coombes, Partner
Montana Pirruccio, Lawyer

[1] Australian Taxation Office, Working from home during COVID-19 (9 July 2020) <https://www.ato.gov.au/general/covid-19/support-for-individuals-and-employees/employees-working-from-home/>.

[2] Australian Taxation Office, New working from home shortcut (7 April 2020) <https://www.ato.gov.au/Media-centre/Media-releases/New-working-from-home-shortcut/>.