WORKING FROM HOME: TAX DEDUCTIONS

 

The New Work-from-home tax “shortcut”

In light of the fact that thousands more Australians are now working from home, the ATO have announced special arrangements that will enable those working from home to more easily claim home office running expenses in their tax returns. Such running expenses include: electricity, heating, air conditioning, consumables ( e.g. stationery) and computer maintenance.

What are “running expenses?”

Think of anything used / consumed by you as you work in your home office that you pay for.

From March 1 this year, employees forced to work from home as a result of COVID-19 restrictions will be able to claim a fixed-rate deduction of 80 cents per hour for all of their running expenses. Multiple people living in the same house can use this new rate. For example, a couple living together and both working from home could both individually claim the 80c per hour rate as a work related tax deduction in their personal tax returns.

In addition to this simple “cents per hour” calculation, the ATO have also removed the requirement to have a dedicated work-from-home area within your home. This logic makes perfect sense, given there are surely many thousands who are working on the kitchen bench whilst perhaps juggling home schooling / toddlers / partners also work from home.

Claims for working from home expenses prior to 1 March 2020 cannot be calculated using this shortcut method, and must use the pre-existing working from home approach and requirements (see the below section for further detail).

The ATO will review this special arrangement for the next financial year as the COVID-19 situation progresses.

 

Short Cut Method: Eligibility to claim

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.

If you opt to go with this short cut method of proving your home office expenses in the preparation of your annual tax return, you simply need to keep a record of the number of hours that you worked from home. For most people, this will be much quicker and simpler than gathering piles of electricity / stationery receipts etc to calculate total figures. If you use the shortcut method to claim a deduction you must include the note ‘COVID-hourly rate’ in your tax return.

 

Available methods of claiming home office expenses

 As a result of this new short cut, there are now therefore 3 ways that you can opt to calculate your additional running expenses from 1 March – June, 30.

  1. Actual Expenses (existing option)

This is claiming the actual work-related portion of all your running expenses, which you need to calculate on a reasonable basis. Please use this link to read about this method in further detail.

  1. Short Cut Method (new option from 1 March- June 30).

This method involves using the above mentioned rate of 80 per hour for all running expenses as discussed above. This method covers: electricity for lighting, cooling or heating and running electronic items used for work, the decline in value and repair of capital items (such as home office furniture and furnishings), cleaning expenses, your phone costs (including the decline in value of the handset), your internet costs, computer consumables (such as printer ink, stationery), the decline in value of a computer, laptop or similar device. Important note: The total that you get when you multiply the number of hours that you worked by 80c; is your total home office deduction for all home office running costs including telephone and internet.

  1. Fixed Rate Method (existing option):

This method is the existing simpler option for calculating home office expenses prior to COVID-19 / the 1st March date that applies to the short cut method. This method is a similar logic to the short cut method however it involves a lower rate of 52 cents per work hour for heating, cooling, lighting, cleaning and the decline in value of office furniture. If you like, you can also opt to use / continue to use this method in calculating your work related home office expense total. If you use this method then, the 52c per hour applies to cover: heating, cooling, lighting, cleaning as well as the decline in value of office furniture. Over and above this you can also claim the work-related portion of your actual costs of phone and internet expenses, computer consumables, stationery, and the work-related portion of the decline in value of a computer, laptop or similar device.

 

  • There is freedom for you to use the method that provides you with the best tax deduction (so long as you are eligible to claim home office expenses).
  • If you have always worked from home, the 52c per hour method may actually be better.

 

The new alternative may well just be easier to those new to working from home.

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Working from home: Claiming the decline of assets

We have discussed above, the claiming of “home office running “costs. Basically, these are expenses / costs incurred in the daily running of your home office. Anything under the value of $300 is a direct expense to be claimed in your personal tax return if you use the actual expenses method, or the original 52c per hour methods discussed above.

An asset is classed as a piece of equipment over the value of $300 that has a future economic value and provides an ongoing benefit to you working from home. E.g. furniture or equipment.

We’ve briefly touched on the “decline in value” of office furniture and equipment above. To further explain, any “asset” over the value of $300 is generally to be added to a depreciation schedule and expensed at a % each year over what is deemed it’s useful life. This is what we call it’s decline in value or depreciation.

For further information on how to calculate depreciation on an item you can refer this handy ATO tool: https://www.ato.gov.au/calculators-and-tools/depreciation-and-capital-allowances-tool/

 

Self employed V Employee working from home

It should be noted that there is a difference between what you can claim as an employee working from home versus a sole trader (partner / trust ) running your own business from home.

If you are an employee working from home, the above decline in value method is how you claim depreciation each year on your assets.

If you are self-employed and thus running your business out of your home, you are almost certainly classed as a small business. If this is the case, then you would have access to the ATO’s now extended instant asset write off rules.

 

Small Business Instant Asset Write-off

What does this mean? In short, if you are a small business you are now able to claim any asset up to the value of $150K as a direct expense in your tax return ( from 12 March, 2020 onwards ). Prior to this, since 2 April 2019 the maximum value was $30k. Obviously this incentive could make a huge difference to your tax return outcome and has been put into place to help support small businesses struggling as a result of COVID-19.

Check out our CODIV-19 Original Economic Stimulus blog post here for further information.

This link is also a handy resource to further explaining the extended instant asset write off rules.

 

Working from home: Claiming “Occupancy Costs”

These are the final classification of working-from-home expenses that we need to cover. They include: Rent, Mortgage Interest, Property Insurance, Land Tax, Rates.

Generally speaking, employees cannot claim occupancy expenses.

There are two very limited exceptions to this rule as follows:

  • The space in the home is a place of business, and not suitable for domestic use – for example, a doctor or dentist surgery or a hairdresser studio in the home
  • No other work location is provided to an employee by an employer and the employee is required to dedicate part of their home to their employer’s business as an office – you can claim the portion of these costs that relate to a clearly identified place of business.

Where your home is your place of business, ( as in you are a business owner as opposed to an employee) you are able to claim the work related portion of occupancy expenses.

A common method of calculating how much to claim is to go off the floor area of your work space as compared to the size of your home and then apply this to your bills with an adjustment to how often you work.

 

Capital Gains Tax and the Main Residence Exemption

Capital Gains Tax is a tax that you are charged as a result of a gain you make in selling an asset that you own that is used for investment purposes. If you sell your own home (that you have only ever lived in and not worked in) whilst this an asset, you have not used this for investment purposes. Therefore, the sale is not subject to Capital Gains Tax. This principle is called the “main residence exemption.”

You don’t receive the full main residence exemption if your home is your principal place of business, although you’re probably entitled to a partial exemption. To calculate the capital gain that is not exempt, you need to take into account a number of factors including:

  • proportion of the floor area of your home that is set aside to produce income
  • period you use it for this purpose
  • whether you’re eligible for the ‘absence’ rule (see Treating a dwelling as your main residence after you move out)
  • whether it was first used to produce income after 20 August 1996.
  • If you first used your home as your place of business after 20 August 1996, the period before you first used your home to produce income is not taken into account in working out the amount of any capital gain or capital loss. Instead, you use the market value of your home at the time you first used it to produce income.

It is a good idea to obtain a valuation of your home at the time you first use it as your place of business, in order that when you come to sell it you don’t pay more capital gains tax than necessary. This would also mean you are prepared for any Capital Gains Tax.

If you own and live in the place your work from and you are planning on claiming occupancy expenses in your tax return as a small business, it is best to get the advice of your accountant first. In many cases, it may not be worthwhile to include these expenses as a deduction in your tax return because any potential capital gains tax may outweigh the benefit of the tax deduction each year.

Having said that, if you are a business owner and you rent the home that you both live and run your business out of; it can often be very well worthwhile claiming your occupancy expenses. You also don’t run the risk of a nasty capital gains tax surprise later.

 

Dedicated work area: further information

As mentioned above, from March the 1st, there is no longer a requirement to prove that you had a “dedicated working area” within your home. The table below details what you can claim PRIOR to March the 1st.

From March the 1st onwards the NO highlighted will be a “yes” if you opt to use the ATO’s short-cut method (only).

Expenses Home is principal workplace with dedicated work area Home not principal workplace but has dedicated work area You work at home but no dedicated work area
Running expenses Yes Yes No (see note 1)
Work-related phone and internet expenses Yes Yes Yes
Decline in value of a computer (work related portion) Yes Yes Yes
Decline in value of office equipment Yes Yes Yes
Occupancy expenses Yes No No

 

Note 1 – applies Pre March 1, 2020:

Generally (and prior to March 1, 2020), an employee who works at home and who does not have a dedicated work area will not be entitled to claim running expenses or their claim for running expenses will be minimal. This is because they can only claim the additional running expenses incurred as a result of working from home – see the example below:

Example: no set work area ( Applies Pre March 1, 2020 only)

James is a high school teacher. From time to time, James works in the lounge room at home to mark tests and prepare end of term reports. He does not have a room set aside exclusively for work. If James’s family is not at home or not in the lounge room with him, he can claim the specific running costs associated with the work he does at home. This includes the work-related portion of the decline in value of the laptop he used to prepare the reports and the additional cost of lighting, heating or cooling his lounge room. He is also able to claim for the cost of the electricity required to power his laptop for the hours that he uses it to work from home. If his family was in the lounge room watching television at the same time that he was in there marking tests and preparing end of term reports, James could not claim the additional cost of lighting, heating and cooling his lounge room. However, he can still claim the cost of electricity required to power his laptop for the time he spent working and the work-related proportion of the decline in value of the laptop he uses to prepare reports.

This example is taken directly from the ATO website.

 

Conclusion

There are three different methods that you to select from in order to claim a deduction for your home office expenses in your annual tax return; depending on your situation. The new “short-cut” method is a simple way to reach a total home office expense deduction figure for those who may be new to working from home. Employees working from home are generally unable to claim occupancy costs, whereas business owners are able to claim these. Having said that, if you are a business owner and you own the home that you also work from, it may be disadvantageous to claim your occupancy costs in your tax return as doing so could open you up for a nasty capital gains tax surprise down the line.

 

 

It has been a pleasure to prepare this summary for you and should you have any queries, don’t hesitate to hit up our friendly team!

 

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