Working from home? Tax deductions explained

Employees working from home due to COVID-19?

With an increased number of employees working from home in the face of the coronavirus pandemic, home office expense claims are expected to rise significantly for the 2020 tax year. If employees are required to work from home, they may be able to claim a tax deduction for expenses they necessarily incur related to performing their work duties.
 
Some of the expenses that can be claimed as a tax deduction by employees required to work from home have been explained below and include home office running expenses, and phone and internet expenses. In most cases, claiming tax deductions for these items will require some substantive evidence which should be understood to demonstrate how the deduction has been calculated. Given the current situation, the ATO have to their credit allowed for a simplified claim using the working from home shortcut method, also explained below.

Home office running expenses

The work-related portion of home office running expenses can be claimed by persons who are required to work from home and have a dedicated working area. To claim a deduction for working from home, all the following must apply:

  • The employee must have spent the money
  • The expense must relate directly to earning income
  • The employee must have a record to prove the expense.
Some common examples of working from home expenses an employee can claim a tax deduction for include:
 
  • lighting, heating and cooling;
  • costs of cleaning the home working area;
  • the decline in value (or, depreciation) of equipment, furniture and fittings in the area used for work. Small capital items costing $300 or less may be claimed in full by individuals i.e. does not need to be depreciated;
  • the cost of repairs to this equipment, furniture and furnishings; and
  • other running expenses, including computer consumables (such as printer, paper, ink etc.) and stationery.

Generally, an employee cannot claim a deduction for occupancy expenses, such as rent, mortgage interest, property insurance, land taxes and rates, unless their home office is a regular place of business. In the event that home is a place of work, these expenses could be claimed, however beware that claiming such expenses may have adverse tax consequences such as impacting the main residence CGT exemption.

Methods to claim home office running expenses

The ATO allows the following methods for calculating running expenses:

Fixed rate
A fixed rate of 52 cents per hour can be claimed for each hour worked from home and represents running expenses. This method is simple and more commonly used as it does not require full substantiation of actual expenses. Employees will need to keep a record of actual hours worked at home or a diary showing the usual pattern of working from home over a four week period (applied across the remainder of the year).

For instance, if an employee spent 5 hours per week for the whole year (48 weeks estimated after excluding public holidays and annual leave), the claim under this method will be: 5 hours per week x $0.52 per hour x 48 weeks = $124.80.

This method covers heating, cooling, lighting, cleaning and the decline in value of furniture.

If using this method, the following can be claimed in addition (if applicable):
 
  • Phone and internet expenses
  • computer consumables and stationery, and
  • decline in value on computer or other equipment
Employees claiming are required to separately work out their eligible claim for these items (as explained below).

Actual running expenses
To calculate the claim for running costs, as an alternative to the fixed rate method employees can use the actual running expenses method. This method is more complex requiring more detailed records but may result in a larger claim.
 
To use this method, they will need to work out how much of their household running expenses ‘reasonably’ relate to performing work in the dedicated office. As an example, a reasonable method of apportionment could include working out what floor area relates to the dedicated home office as a percentage of the total floor area of the home. This percentage is applied to actual running costs incurred during the period including electricity etc. Employees will need receipts of expenses and records to prove the claim.
 
Phone and internet expenses
If employees use phone or internet for work, they can claim a deduction for the work-related percentage of these expenses if they paid for these costs and have records to support their claims. As above, they will need to formulate a reasonable method of apportioning their work percentage of claims, ordinarily done in the form of a logbook demonstrating a usual pattern of work use.
 
As an alternative, a tax deduction of up to $50 with limited documents can be claimed based on a set rate for work related use of:
 
  • 25 cents for calls made from a landline
  • 75 cents for calls made from a mobile
  • 10 cents for text messages sent from a mobile.
Working from home Shortcut method
Given the volume of people required to work from home due to COVID-19, the ATO has provided a shortcut method to claim tax deductions at a flat rate of 80c per hour.

This method is only available for hours worked from home from 1 March 2020 and unless extended, will apply to 30 June 2020. Claims before 1 March 2020 will need to be calculated using the above-mentioned methods.
 
This method covers all running costs (including depreciation, phone and internet costs), and there is no requirement to operate in a dedicated work area to claim a tax deduction under this method during the eligible time period.
 
All that is required is a record of the hours worked from home. Further, multiple people in the same household working from home can each make a claim under this method.
 
For instance, if an employee worked from home 5 days a week, 7.5 hours each day, the claim for that week will be $30 (7.5 hours per day x 5 days a week x $0.80 per hour). Depending on the actual number of hours of working from home during 1 March 2020 to 30 June 2020, the claim using this method can be substantial.
If a person worked from home prior to 1 March 2020, then they will need to use one of the other methods to calculate the claim for this period.

Frequently asked questions by employees

My employer paid for the expenses, can I still claim a tax deduction for these costs?
Where an employer pays for or reimburses the expense, it will not be claimable to the employee as they have not incurred any expenditure. To claim a deduction, you need to have paid for the costs yourself and not be reimbursed by your employer.

What should I do if I don't have a separate working area?  
The ATO methods assume you have a separate room dedicated as a home office. If you are working from the dining table or the couch, you generally cannot use the fixed rate method to claim any expenses. However, you can still claim running costs associated with the work done from home, such as:
 
  • the work-related proportion of the decline in value of the computer or office equipment;
  • work related telephone and internet costs; and
  • cost of electricity to power computer or laptop for the hours spent working at home.
If you are using a room with a dual purpose (e.g. dining room), you can only claim running expenses for the hours you had exclusive use of the area. That is, you cannot claim the additional cost of lighting, heating and cooling this room when other members of your household are also using it for private purposes.

A separate working area is not required to claim using the Shortcut Method.

My working pattern has changed due to COVID-19. How do I calculate my claim?  
The ATO advises that if you use the four-week representative period to calculate your expenses over the income year and your usual pattern of work changes throughout the year, you will need to keep separate records to show your expenses.
 
For example, if you normally work from home one day a week and due to an emergency situation such as COVID-19, you’re required to work from home every day for a prolonged period, you need to keep both the following records:
 
  • the actual hours you have worked from home during the COVID-19 situation, and
  • your usual working from home arrangements.
Given the indefinite quarantine that many employees are facing due to COVID-19, a four-week diary is unlikely to reflect a representative proportion for the entire year. Therefore, it is worthwhile keeping a separate record of the time spent working from home during this period to justify a larger claim.

I am sharing the home office with someone else in the household. How does this impact my claim?
In case someone else in the household share the home office, you will need to apportion your expenses accordingly on a ‘reasonable’ basis. This does not apply when taxpayers use the shortcut method to make a claim.

Record-keeping requirements

It is a requirement to keep on top of any record-keeping so that you can provide adequate records to substantiate a claim.

If using the fixed rate method:  

  • Maintain a logbook of the actual hours worked from home, or
  • Keep diary for a representative four-week period to show the usual pattern of working at home. This amount of use can then be applied over the entire year to determine the full claim.
  • If applicable, keep a separate record of the unusual actual hours have worked from home, for example, due to the COVID-19 situation.
 If using the actual running expenses method:  
 
  • Keep a diary for a representative four-week period, detailing the time spent in the home office, compared to other users of the home office.  Note the percentage of work-related time and personal use time.
  • Keep records of all bills and receipts, including for any depreciating assets purchased. Bank statements generally do not have enough information to substantiate expenses to the ATO.
  • Holding on to paper copies of bills and receipts is not necessary, a good quality electronic copy is enough.
 For phone and internet expenses:  
 
  • Up to $50 can be claimed with limited records.
  • A four-week diary can be kept documenting the work usage of phone and internet.
  • The ATO recommends keeping itemised phone accounts to identify work related calls.

 
Always remember that the burden of proof lies with the taxpayer to substantiate a claim they have made in their tax return.
 
Depending on a taxpayer’s other income, there may be a requirement to keep detailed records of how a claim was calculated for up to 4 years from the date a particular Income Tax Return was lodged. This may be shortened to 2 years in some circumstances.
 
It can be tricky navigating around the different requirements and methods to claim work-related expenses. If uncertain about how or what to claim, please feel free to contact us for advice.
 

How can Moore Stephens help?

If you need any assistance understanding the above, please contact us so we can help address your unique situation.