As technology continues to advance, it must have come crossed the minds of many, that, one day, working from home (WFH) would actually become the “new normal”. But how little did we know, that this day would come this fast. Coronavirus has changed it all for us.
Before you know it, working from home tax deductions has become more relevant to you than ever. And you start to ask questions like:
Now that I am working a lot more from home, what are my tax consequences?
What kind of deductions that I can claim? And which ones I can’t?
What records do I need to keep to support my claims?
You certainly do not want to miss out on claiming any deductions that you are entitled to.
That’s why I’ve put together this guide to help you.
To clarify, this post addresses only the scenario of an employee working from home. If you are a home-based business owner, please check out my other post here.
Non-deductible home expenses
Before I delve into the list of specific home office tax deductions and their claiming conditions, we need to be clear on the expenses that are generally NOT deductible for working from home employees:
- coffee, tea, milk and other general household items your employer may provide you at work
- childminding and costs for their education
- expenses that your employer pays for or reimburse you
- the decline in value of items provided by your employer – for example, a laptop or a phone.
- any occupancy expenses such as:
- mortgage interest
- land tax
- home insurance
- rates etc.
Want to claim rent? Let me repeat this: No. No.
What you can claim depends on how you work from home
When considering working from home deductions, as a starting point, you need to define how you work from home:
- you have a dedicated work area (a room such as a study or spare room is set aside primarily or exclusively for work activities)
- you do not have a dedicated work area
- you are running a business from home (not discussed in this post. If you are a home-based business owner, please click here )
The quick conclusion is, you can generally claim more expenses if you have a dedicated work area at home.
How to do the math?
How are the deductions calculated? What are the rules and methods? Is there an easy way to calculate the home office deductions?
Currently, the ATO allows for three ways to calculate your possible deductions: the shortcut method (a simplified temporary method created for Covid), the fixed rate method and the actual cost method.
Basically, you can choose whichever method or methods that give you the best outcome, as long as you meet the criteria of utilising the method and have kept proper records as required by the ATO.
But before we can do the actual math, we need to get to know these methods and their rules in detail first.
First and foremost, how you work from home also affects which methods you can use:
Now the dry but important stuff – let’s look at these three methods in detail:
Below table contains a large amount of technical information, which can be challenging to grasp in one read fully. If this becomes too complicated for you, make sure you talk to your accountant or contact us for some professional guidance.
Each method has its pros and cons.
To simplify home office claims for employees working from home due to Covid, the ATO introduced a third way of calculating the claim – the 80 cents shortcut method, which requires very minimal substantiation. However, this is not necessarily your best option.
For example, if you work from home 8 hours per day, your allowable daily deduction would be $0.80 x 8 hrs = $6.40 only.
Imagine if it is a hot day and your air-conditioning has been on for 3 hours while you are working?
In this case, despite the hassle, it might be worthwhile checking out the other methods to get a better outcome.
Although the fixed rate method has a lower claim rate (52 cents), thus appears to be a worse option, you could still end up with a better outcome this way as, under this method, not only can you claim the flat-rate calculated amount, but you can make separate claims on other expenses such as phone, internet, computer consumables and electronic devices; whereas the shortcut method doesn’t allow this.
The downsides of applying this method are the increased level of substantiation and the requirement of having a dedicated work area.
Regardless of its complexity, you may still choose the actual cost method in one or more of the following possible scenarios:
- you don’t have a dedicated work area; thus you can’t use the fixed rate method, and the 80 cents shortcut method can’t really cover the estimated home office expenses you’ve incurred (e.g. you have a high usage % of home internet and phone for work);
- you have a dedicated office that takes up a big portion of your entire home, or the utility consuming units (e.g. heater) in your office have high kW/h, and you use them quite frequently while working. In either case, the 52 cents fix rate might not be able to cover the actual utility costs.
- you have a dedicated office, and you’ve spent a lot on office furniture and fittings; therefore you prefer to claim the actual amounts rather than being covered by the 52 cents fixed rate.
Again, each method has its benefits and drawbacks, and there is really no one-solution-for-all answer here. Above are merely some general guidance to help you predict the possible best way given your own situation.
However, the safest way is always to do the match for each and then compare for the best option.
Example – compare to work out the best method:
Rita is a civil engineer for a large company based in the CBD of Sydney. She normally works from home on Fridays and occasionally on other days. Her employer provides her with a laptop and phone to use. From 1 July 2019 to 29 February 2020, based on her diary pattern, she worked out working from home hours was 10 hours per week except for the 4 weeks annual leave taken during the Christmas time.
Since 1 March 2020, due to the Covid situation, she started to work full time from home, which was 37.5 hours per week. She also purchased a work chair (90% work usage) for $256 in late March.
Rita uses a spare room as her dedicated work area. Her monthly home internet bill is $59. She determines her home internet work usage was 10% before 1 March 2020 and 60% after.
Also, Rita’s electricity usage records are as below:
- used her air conditioning for 50% of the time she spent working from home – the air conditioner uses 2kW for cooling and heating per hour.
- used two 12 watts LED lights in the office whenever she is working.
- used her work laptop whenever she is working from home – the laptop uses 50 watts per hour.
- she pays 25 cents per kW per her electricity bill
To prepare her 2019-20 income year tax return, Rita needs to compare the three methods to work out the best outcome.
The math clearly says the fixed rate method is her best option.
Phew…! Congrats if you have made it all the way here.
Now you have all the information you need to work out which working from home expenses you can claim which methods you can use, and how to calculate and compare to get the best outcome.
Ensure you keep all the records (can be in digital format) for at least 5 years from the date you lodge your tax return.
If you are D.I.Y. ing your own tax return, input your claim under D5 Work-Related Deductions and lodge your return accordingly.
If you are looking for support, we are here for you.
Please note that this post is intended to be a general guide only, and should not be seen to constitute legal or tax advice. Where necessary, you should seek a second professional opinion for any legal or tax issues raised in your personal or business tax affairs.