Disclaimer: Talk to your accountant for specific advice for your situation. This is a guide only. For an expense to be tax deductible you must have spent the money, the expense must be directly related to earning your income and you must have a record (e.g. receipt) to prove it.
Due to the outbreak of the Covid-19 pandemic in 2019, many of us began working from home. As the lockdown got lifted and we started adjusting to the new normal, work from home became a long-term work situation for most of us. This has had us scratching our heads on the scope of home tax deductions.
You’ll be pleased to know that the Australian Taxation Office (ATO) has made it easier for Australians to claim some of the expenses incurred while working from home as a tax deduction.
In this guide, we’ll outline how you can calculate home office tax deductions using the new simplified method, as well as the other two methods available. And help you determine which method is suitable for you.
How to calculate work from home office deductions?
There are three ways you can choose to calculate your home office tax deductions, namely:
- The new simplified method (short cut method);
- Fixed-rate method; and
- Actual cost method.
Which is the best home office tax deduction method?
For most people the actual cost method will give you the best tax deduction. However the simplified method will be the easiest for you to use.
Use our work from home tax deduction calculator at the top of this page to determine which method is best for you.
Either way, keep all of your receipts and bills! Don’t forget to set a reminder in your calendar for July 2020 and July 2021 to discuss this with your accountant.
Simplified home office deduction method
The ATO has a new, simplified method for calculating tax deductions for people working from home due to the COVID-19 pandemic.
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.
That means you can’t claim deductions for items provided by your employer or if you’ve been reimbursed for the expense.
More importantly, you do not need to have a separate or dedicated area of your home set aside for work, such as a private study in order to claim these deductions.
How to calculate home office tax deduction using the simplified method?
The simplified shortcut method of calculating home office tax deductions:
- You do not have to keep track of expenses or calculate the specific costs; you only have to keep records to substantiate the number of hours you worked from home. Timesheets, diary notes or rosters are examples of records for this purpose.
- Simply multiply the total hours you worked from home in this period by 0.80 (80 cents on the dollar). The result is your tax-deductible expenses. This is meant to include electricity usage, phone and internet costs, depreciation etc.
- You can still use the other methods of calculating tax deductions, but, you’ll have to keep receipts and other records for those.
The method initially could be used to calculate the tax-deductible for the period between 1 March 2020 until 30 June 2020. This period has now been extended to 30 June, 2021.
Where do I claim home office deduction?
You can use this short cut method to claim a deduction for tax returns submitted through myGov or a tax agent, until June 2021.
Please note that you must include the note “COVID-hourly rate” in your tax return when doing so.
List of home office deductions that you can claim
If you work from home, here’s a list of home office deductions you can claim for the additional running expenses you incur for:
- Electricity expenses;
- Cleaning costs for a dedicated work area;
- Phone and internet expenses;
- Computer consumables (printing paper and ink) and stationery supplies; and
- Deduction for home office equipment, including computers, print etc. You can claim the full cost of items up to $300 and a decline in value for items over $300.
Remember if you’re unsure whether or not you can claim that expense as a deduction, please keep a receipt of that expense, and you can consult your accountant or a tax agent before submitting your tax returns.
List of home office deductions that you can’t claim
If you’re working from home only due to COVID-19, you can’t claim home office deductions for:
- Occupancy expenses such as mortgage interest, rent and rates;
- The cost of coffee, tea, milk, and other general household expenses your employer may otherwise have provided you at work.
How to claim your internet and phone expenses as a tax deduction while working from home?
To claim your internet or phone expenses as a tax deduction come tax time:
- First, work out what percentage of your home internet and phone do you use for work purposes. E.g. If you think you use 30% of your internet for work purposes, then take 30%.
- Secondly, work out 30% of your monthly internet and phone bill.
- Finally, multiply your monthly work-related bill by 12 to give you a figure for the year or whatever period you worked from home.
For example, if you estimate you use your phone or internet 30%, your monthly phone and internet bill is say $150, which would make your work-related monthly expenses $45 per month.
Now, if you’ve worked from home for three months, then you can claim a tax deduction of $135 in internet and phone expenses working from home.
A word of caution about claiming work from home tax deductions!
You can only claim the portion of expenses you’ve incurred for work purposes when working from home and not personal use.
The ATO monitors tax returns. As such you may have to show the calculation you’ve used to claim your tax deduction or else you may be hit with a fine.
As is always the case with taxes, please seek advice from a registered tax agent or your accountant.
Can I claim home office deduction for occupancy expenses (such as rent, mortgage interest, insurance, rates)?
You can only claim occupancy expenses (such as rent, mortgage interest, insurance, rates) if your home is your principal place of business.
A common method of working out how much to claim is the floor area (as a proportion of the floor area in your whole home).
You can claim the portion of these costs related to the room or workshop you use as a place of business. Please use our home office calculator above to determine just that.
Please note that doing this may have capital gains tax implications on your home, which is usually exempt. The ATO notes that “CGT may apply if you are running a business from home or claiming occupancy expenses (like mortgage interest repayments or rates).”
Your home is also your principal place of business; the rules can be complex. Please seek professional tax advice from a qualified tax agent or accountant.
Three golden rules to be eligible for home office tax deductions
To be eligible for a home office tax deduction, all of the following three must apply:
- You must have spent the money;
- The expense must be directly related to your income; and
- You must have records to prove it.
Fixed-rate method of calculating home office deductions
With the fixed-rate method of calculating home office deductions, you can claim:
- 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;
- The work-related portion of the decline in value of a computer, laptop or similar device.
This rate is based on average energy costs and the value of common furniture items used in home business areas.
How to claim home office deductions using the fixed rate method?
To claim tax deductions using the fixed-rate method, keep records of either:
- Your actual hours worked from home for the year or
- A diary for a representative four-week period to show your usual pattern of working from home.
You can then apply the four-week representative period across the remainder of the year (or the number of months you worked from home that financial year) to determine your full deduction amount.
Keep in mind that you need to separately work out all other home work area expenses, such as:
- phone and internet expenses;
- computer consumables and stationery; and
- the decline in value on computers or other equipment.
Actual cost method
How to claim tax deductions using the actual cost method?
When using the actual rate method, you’re required to keep records as detailed below:
- Diary entries for a representative four-week period to show your usual pattern of working from home that shows you worked from home and made work-related phone calls.
- How you work out how much you used your equipment, home office and phone for work purposes over a representative four-week period receipts or other written evidence, including for depreciating assets you have purchased.
- Diary entries to record your small expenses ($10 or less) totalling no more than $200, or expenses for which you can’t get any kind of evidence.
- Itemised phone and internet accounts (paper or electronic) from where you can identify work-related calls and internet use, or other written records, such as diary entries if you don’t get an itemised bill.
What are the records I must keep to claim home office deductions?
The type of records you must keep depends on what method you’ve chosen to calculate your home office deductions.
- If you are only working from home due to COVID-19 and are using the shortcut method (80c per hour from 1 March 2020), you only need to keep a record of the number of hours you worked from home (e.g. timesheets or diary notes).
- If you’re using the fixed-rate method (52c per hour) you need to either keep: detailed records of the number of hours worked from home or a diary with a 4-week representative period to show your usual working patterns. Please note that you still need to have documents to show your other expenses, such as phone expenses, internet expenses and computer supplies.
If you’re using the actual expense method, you need to keep detailed records, these include:
- Receipts for items of equipment you’ve purchased.
- Diary entries to record your small expenses ($10 or less) totalling no more than $200, or expenses you cannot get any kind of evidence for.
- Diary entries indicating your running expenses. You’ll need to detail the time you spend in the home office compared with other users. Keep diary records for a minimum 4 week representative period.
- Itemised phone accounts from which you can identify work-related calls.
- Keep your receipts for items you will claim outright (for example, stationery or statements for electricity and gas).
Which home office deduction method is suitable for me?
The tax-deductible amount you can claim will be different based on which of the three methods you choose.
You can use our home office tax deduction calculator above to compare your tax deductions as it gives you the deductible amount using both the simplified method and the actual cost method. Note it doesn’t give you tax deductions using the fixed-rate method.
So, use the one that gives you the highest tax-deductible.
However, you’ll be required to maintain more detailed records of your expenses, with both fixed-rate method and actual cost method.
Both these methods are suitable for a person who likes to maintain detailed records or receipts and is comfortable working with google sheets or excel worksheets.
For an average person with not a lot of time, the simplified method may be well suited.
This is general advice. Please talk to your accountant or a registered tax agent for specific advice on tax issues.
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