For some time now, the Australian Taxation Office (ATO) has been troubled by individuals claiming tax deductions for a whole host of expenses on their tax returns. What’s currently trending on their ‘hit list’ are home office expenses. In this article, we’ll guide you through what you can and can’t claim if you work from home.
Last financial year, 6.7 million taxpayers declared a record $7.9 billion in tax deductions for ‘other work-related expenses’ which includes expenses for working from home. While the ATO appreciates the fact that technology has led to more people working from home and has given them greater flexibility, they don’t accept that all of the claims being made are legitimate.
Take the example of the school principal who declared $2,400 for electricity and phone expenses incurred during the year. The principal had a letter from the school confirming that they were required to work from home outside of school hours. However, she could not explain how she calculated the claim. Therefore, she ended up voluntarily reducing the claim by 70%.
Another example is the advertising manager who claimed her rent as a tax deduction because she worked from home at irregular hours due to her overseas clients working in different time zones. Her tax write-off for rent was rejected.
A major vexation for the ATO is the people who claim 100% of their expenses like mobile phone plans and internet services when they’re mostly used for personal use. If you claim 100% of your phone and internet expenses but are not running a business from home, you can expect the ATO to take a closer look at your claims, and that goes for subcontractors as well.
Calculating the work-related part of your expenses
You must be able to prove how you came up with your home office expense claim. This includes having a documented method of computing the work-related part of that claim if the item you are declaring is used for private and business purposes.
For phone and internet expenses, for instance, you might look at the number of business calls, the time spent on those calls, or data downloads as a portion of the total bill.
Another method is to complete the equivalent of a log book over four weeks to track your business use of the equipment. You could then apply the work percentage over that four weeks to your annual expense.
So if you used your mobile phone for 20% of the time for work over those four weeks, you could then claim 20% of your annual phone expense as a home office expense, assuming your circumstances don’t change across the year.
What can you claim?
Many individuals do some sort of work from home. It might be as simple as answering emails or working from home for a few days a week. So, what can you claim if you’re putting in the extra hours at home?
If you don’t have a dedicated work area but get your work done on the couch or at the dining room table, you can claim some of your expenses such as the work-related portion of your phone and internet expenses and the decrease in value of your personal computer.
This assumes that your employer doesn’t compensate you for your phone and internet expenses, and you bought your personal computer yourself.
You are able to claim up to $50 for phone and internet expenses without proving the claim. Although, the ATO may still ask you to give proof that you actually incurred the expense. You can also calculate your actual expenses which we’ll show you how in a bit.
If you do have a dedicated work area in your home, there are a few more expenses you can claim which includes some of the running costs of your home such as a part of your electricity expenses and the decrease in value of office equipment.
Home office expenses you can claim
- Running expenses – if you have a dedicated work area in your home such as a room that’s used exclusively for work, the necessities to keep the work area running like electricity, office equipment, cleaning etc., can be claimed as an expense. Naturally, any claim can only be for the work-related part of the expense. If your family members use your home office as well, or you also use it for personal use, then you can only claim a portion of the expense.
Your running expenses can be claimed:
- at a fixed rate of 45 cents per hour – this involves either tracking the actual amount of time you work from home or keeping a log book over four weeks that can be applied to your expenses throughout the year.
- as an actual expense – to claim an actual expense requires logging the total expenses for lighting, cleaning, heating and cooling for your home for the year, working out the floor area of the part of your home that you use for work as a percentage of the total floor area, and then work out the percentage of the year you used that part of your home for work purposes only.
- Occupancy expenses – expenses such as rent, property insurance, interest on your home loan, land taxes and rates can only be claimed if your home is your ‘place of business’ and no other work location has been assigned to you. A place of business is inappropriate for any other use other than business.
To claim occupancy expenses, calculate your total expenses × floor area × percentage of year that portion of your home was used purely for work purposes. In general, occupancy expenses are not a deduction obtainable to employees.
- Work-related phone and internet expenses – if you are not running your own business from home and do not have a dedicated phone and internet service for your business, it’s unlikely you can claim 100% of your phone and internet expenses. Also, if your employer provides you with a phone, you cannot make any claim for these expenses. In addition, if you are a casual worker, you cannot claim a deduction for phone rental expenses.
As for the others, you can claim up to $50 for phone and internet expenses without substantiating the claim. However, the ATO may still expect you to prove the claim. You can also just work out your actual expenses.
Claims for actual expenses can be made by calculating the work-related use of the phone and internet and then applying that percentage to the expenses.
- Decline in value – for depreciable assets such as personal computers and printers, you may be able to claim a decline in value if the cost of the equipment was over $300.
Furthermore, decline in value deductions may also be available for office furniture used for work purposes in a home office. However, this does not apply to individuals using the fixed rate of 45 cents per hour to claim running expenses.
Here is the ATO’s table of home office expenses you can and can’t claim.
|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|
|Work-related phone & 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||No|
Should you have more questions about claiming home office expenses as tax deductions, we’re happy to help. Contact a Chan & Naylor tax accountant here today.
Aside from legally reducing your tax costs, have a look at our other accounting and advisory services that we do to help you achieve greater financial success.
The Chan & Naylor Group has national offices in North Sydney, South West Sydney, Sydney, Pymble and Parramatta in New South Wales, Melbourne, Moonee Ponds and Hawthorn in Victoria, Brisbane and Capalaba in Queensland, and East Perth in Western Australia that can assist you with your tax deductions. Contact us today.