Changes to Home Office Expense Deductions This Year
With many Australians now working from home and incurring additional costs, the ATO has announced measures to enable these costs to be included in your 2020 tax return.
It is important to remember a few basic rules when reviewing the deductibility of your expenses. Creating some recording keeping processes now will help you to maximise your tax deductions when you are ready to lodge your 2020 income tax return.
To claim a deduction for working from home expenses the following must apply:
You must have paid for the expense - this means you can’t claim a deduction for items provided for by your employer or have been reimbursed for by your employer
The expense must be directly related to earning your income
You must have a record to prove it
If you are not reimbursed by your employer but receive an allowance from your employer to cover these expenses you must declare this allowance as income in your tax return and then claim a deduction for the expense using the usual rules.
The ATO advises that expenses that you can claim with respect to working from home include the following:
Electricity expenses associated with heating, cooling and lighting the area from which you are working and running items you are using for work
Cleaning costs for a dedicated work area
Phone and internet expenses
Computer consumables (for example, printer paper and ink) and stationery
Home office equipment, including computers, printers, phones, furniture and furnishings – you can claim either the full cost of items up to $300 or decline in value for items over $300
If you are working from home only due to COVID-19, you can't claim:
Occupancy expenses such as mortgage interest, rent and rates
The cost of coffee, tea, milk and other general household items your employer may otherwise have provided you with at work
There are three methods that you can use to calculate your working from home expenses:
Short Cut Method
Claim a rate of 80c per work hour to cover all of your working from home expenses. This method is only available to individuals who are required to work from home as a result of COVID-19.
You do not need to have a separate work area however you must have incurred additional expenses in the allowable expense categories in order to use this method.
In order to use this method, you will need to keep a record of hours you worked from home for example timesheets or diary notes. The short cut method will cover all allowable deductions and you won’t be able to claim any further home office expenses under this method.
The ATO website has further information on this temporary method for claiming your home office expense tax deduction. For the 2020 financial year, this method is available from 1 March to 30 June 2020.
Fixed Rate Method
Under this method you are able to claim all of the following:
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
Actual Costs Method
Under this method, you are able to claim the work-related portion of all home office running expenses on a reasonable basis.
For the fixed-rate and actual costs methods, you will need to keep records for the expenses incurred ie invoices and receipts. In addition to this, you will need to keep a record of the hours you worked from home.
There are also separate rules for the types of expenses that you can claim under the fixed-rate and actual costs methods depending on how your home office is set up.
It is obvious here that the Fixed Rate and Actual Costs Methods require more record-keeping than the temporary short cut method. However, depending on the value of your expenses, the time you are spending working from home and whether or not you have a dedicated workspace at home, using the fixed-rate or actual costs method could increase your claim considerably.
Homeowners should also consider that claiming a tax deduction for a dedicated home office exposes you to a capital gains tax liability on your home which is normally exempt under the main residence exemption. The logic here is that a portion of your home is now income-producing and therefore that income-producing portion of your asset is no longer exempt from capital gains tax.
You can read more about Home Office Expenses on the ATO website.