Working from home and tax deductions are now more relevant than ever. The pandemic and related restrictions on either leaving the house or gathering in enclosed spaces has forced many to work from home and encouraged many others to embrace options for enhanced workplace flexibility.
There are long standing principles on the tax deductions that are available for working from home. Pandemic restrictions have not changed these principles, although they have brought about a new calculation for determining them.
Home office, or place of business?
The principles in question depend upon whether you simply work from home or if you operate a business at home. From there, it depends on where you undertake these activities. The Tax Office (ATO) refers to claiming running costs (working at home) versus claiming occupancy costs (running a business). Should you fall into the latter category, your scope of claimable deductions is broader, but there is a sting in the tail discussed further below.
Place of business
A home based business exists where your home is also your principle place of business. The business is either run from your home, or you have a room or other space set aside exclusively for business activities. This separate place could include a garage or separate unit/room in the driveway or backyard.
The ATO confirms that a home based business can be run:
- At home – you do most of the work at home. The example given is a dress maker who conducts their work at home and has clients visit for fittings.
- From home – the example given is a tiler who does all their work on client premises, but does all record keeping and stores all tools and supplies at home.
These principles are clearest for sole traders or partnerships conducting a business from home, as opposed to a company or trust structure that is theoretically renting space from the home owner.
If the home is not your principle or main place of business, but you do some work from home, then you fall into the “home office” category; discussed further below as far as deductions you can claim.
Working at home generally means that you are working to fulfil your employment duties and not just carrying out minimal tasks such as checking emails or taking phone calls. You can either work in a specific and separate home office area, or you can be working in a more general area like the dinner table, kitchen bench or couch.
There are currently 3 methods available for claiming home office costs. These are:
- Short cut – $0.80 cents per hour worked at home. You do not need a separate dedicated work area and this covers all deductible costs, including equipment depreciation. It is important to note that the ATO has stated that this method is only valid until 30 June 2021. We will see if they extend the applicable period in light of extended lockdowns since that date.
- Fixed rate – $0.52 per hour worked at home, plus work percentage of phone/internet, stationary and equipment costs and depreciation. You do need a separate dedicated work area to use this method.
- Actual costs – no hourly rate, so you claim a percentage of actual bills for utilities and cleaning, usually based on the floor area of your home office compared to your whole house. You also claim the work percentage of phone/internet, stationary and equipment costs and depreciation. You do need a separate dedicated work area to use this method.
Summary of available deductions
Looking at the methods available and keeping in mind that deductions listed are available to the extent used for work/business, here is the summary of what is available to be claimed under each method:
|What||Short cut method||Fixed rate method||Actual costs method||Place of business|
|Rate per hour||$0.80||$0.52||X||X|
|Phone and internet||X||✔||✔||✔|
|Interest on mortgage||X||X||X||✔|
For equipment write offs it is worth mentioning that under the fixed rate or actual costs methods you can write off equipment that costs less than $300. However, for the fixed rate method you cannot write-off office furniture, as that is factored into the $0.52 per hour rate. For a business activity, there is currently full write-off available for business assets purchased, which is proposed to remain in place until 30 June 2023.
Motor vehicle expenses
Although not strictly a working from home deduction, it is worth noting that the distinction between a home office and a home business also affects motor vehicle deductions that are available. In summary, if you have a home office and carry out employment duties, then travel between your home and place of work is not considered business travel. In contrast, if you have a home based business, trips you make from home to see clients/work sites are considered business travel.
Place of business and Capital Gains Tax (CGT)
The sting in the tail referred to earlier relates to CGT. As a basic principle, if you have purchased a house and only ever lived in it, then upon sale it is currently exempt from CGT and thus tax free upon sale. However, if you are entitled to claim deductions for occupancy costs, then the portion of the property that relates to those deductions is subject to CGT on sale, so the property will not be fully tax exempt.
Note that the test is whether you are entitled to claim deductions. Technically, if you forego claiming the deductions then you still miss out on the full CGT exemption, as you were entitled to claim them. Therefore, any modifications to a property for the purposes of conducting a business activity need to be considered, along with future CGT implications.
Lastly, it is always important to remember record keeping requirements. For a home office – and also a home based business – you need to be able to demonstrate the following:
- That your employment or business required you to undertake work activities at home.
- The amount of time spent on those activities if a review is undertaken by the ATO. The ATO has suggested a diary showing a representative 4 week period of work undertaken at home. However, conventional work hours, testimony from employers and work calendar/diary entries will also support any claims.
- That your separate home business area or home office is exclusively used for work/business purposes.
- Bills for utilities if a portion of those are being claimed under fixed cost method or as a home business.
- Receipts for any equipment written off immediately or over time.
Beyond determining whether your current working arrangement is categorised as either a place of business, or a home office, keeping an accurate record of your working circumstances will be critical when verifying appropriate tax deductions. Additional expenses will often arise when establishing a working from home office, from equipment and furnishings to business travel, or costs of running the working space such as gas and electricity.
As noted, there are a number of different tax considerations to working from home, along with different methods to calculate deductions. Operating a home based business requires careful consideration given the potential CGT implications in the future.