Working from home definitely has its perks - most offices don’t let you wear your tracksuit to work and rock big fluffy uggs either!
Whether you are an employee who works from home, or you run your business from the comfort of your own home, the ATO allows you to claim a deduction for expenses you incur relating to your work. What you can claim as a deduction depends on what method you choose to use.
Let me explain.
If you are a sole trader, scroll past this section!
Pre COVID-19, there were two methods in which you could calculate your home office expenses deduction. These were:
The ATO has also introduced the Shortcut Method, however this is only available as a deduction method from 1 March 2020 to 30 June 2020 (when COVID-19 started heavily impacting our daily lives here in Australia).
The most important thing to note, for any of these methods, is a ‘logbook' or diary of hours worked from home is required. You will base many of your calculations from this.
Fixed Rate Method
Under this method, you can claim 52 cents for each hour (2020 rate) you spend working from home. This covers all costs you incurred on the following expenses:
Note: No double-dipping! You can’t make a separate deduction for the electricity bill - that is covered by this methods ‘hours x rate’ calculation.
To be eligible to claim this method you must have a dedicated area in your house specifically set up for your home office. You can’t claim home office expenses under this method if you sit on your couch, in your living room, with your laptop on your lap.
You must keep a log of how many hours a year you spend working from home. Alternatively, you can keep a log of how many hours you spend working from home over a four week period, as long as it is a representation of your normal working pattern.
Hot Tip: we have a handy spreadsheet template for our clients that helps you to track this.
This method does not take the following expenses into account:
To claim the above expenses as deductions, you will need to calculate their work related portions. To do so, you definitely need to keep receipts and purchase invoices (which you should be doing anyway)! You can use your log of working from home hours (from above) to help calculate the work-related portions of your expenses. You should also keep written evidence of small purchases (such as a packet of pens, printer paper, additional phone data) that you made and did not receive a receipt for. These expenses must be under $10 each and the total of them all must not exceed $200 for the financial year.
Actual Cost Method
The Actual Cost method is fairly self explanatory - you can claim the actual costs you incurred from working from home. These expenses can include:
To claim the biggest deduction under this method, you must have a dedicated work area. If you are sitting on your bed while working, you will have incurred only minimal extra running costs.
Receipts and evidence are a must under this method and deduction amount requires a large amount of calculations.
For example, to claim electricity under this method you must work out how much you pay in electricity per kW, the average kW each piece of equipment or appliance uses per hour, and the total amount of hours spent working from home. Sounds super confusing doesn’t it!?
If you want to claim cleaning expenses for your home office, you will need to know the percentage of floor area your dedicated work space takes up from the whole floor plan, add up all cleaning expenses of the entire house and multiply by the floor area percentage.
Sounds awful right? Far too many calculations...
This method has been introduced in response to the multitudes of people now working from home. It is only temporary, and can only be used to calculate home office expenses between 1 March and 30 June 2020. Similar to the Fixed Rate Method, you will multiply the hours worked from home by the accelerated rate 80 cents (per hour).
This deduction method covers the following expenses:
You can choose to apply this method to your home office expenses if you are still fulfilling the same work you are employed to do, and you have seen an increase in your home running costs as a result. This covers all possible home office expenses, so you cannot make any other home office deduction claims.
You do not need to have a specific work area under this method, however you are still required to keep a record of hours worked from home.
Can I use a mixture of methods to maximise my claim?
As the ATO has only introduced the shortcut method recently, you are able to use a mixture of the shortcut and fixed rate method to maximise your claim. For example, you can use the fixed rate method from 1 July 2019 to 29 February 2020, then use the shortcut method from 1 March to 30 June 2020.
As a sole trader you may be able to claim running expenses and occupancy expenses used for business purposes as a deduction.
Occupancy expenses are expenses incurred in owning, renting or using your home. These include:
However, to claim these occupancy expenses, you must first pass the ‘interest deductibility test’. Let’s break it down for you.
Whether you pass the interest deductibility test or not depends on the following conditions:
If you pass this test, you can claim occupancy expenses, but be very wary - if you own your home (not rent) and claim like this, then you may be slugged with Capital Gains tax if you sell your home. More on this in another blog - but always consult your accountant!
The best way to claim occupancy expenses is based on the percentage of floor area your designated work space takes up of the entire house. For example, if your photography studio and office space takes up 25% of your house, then you can claim 25% of your occupancy expenses. Make sure you keep a record of all expenses - snapping a picture and uploading them into the cloud is the best option, and summarise them in a little spreadsheet for easy calculations later.
Running expenses are:
There are two methods which you can use to claim running expenses; Floor Area or Hourly Rate.
The Floor Area method takes into account electricity, gas and cleaning running expenses. Decline in value and landline costs are accounted for separately.
Similar to occupancy expenses, you calculate your running expenses deduction based on the total floor area that your home office space takes up. If it takes up 25%, then you claim 25% of your electricity, gas and cleaning expenses.
The Hourly Rate Method is similar to the fixed rate method that employees of a business can claim. You can claim 52 cents per business hour worked. You can either use actual hours worked (ie. you clock every hour that you sit and work), or you can create a work ‘logbook’ and establish a pattern of hourly use over a 4 week period. You then, apply the rate the ATO gives us each year to those hours to get the deduction.
Sole Traders who work from home, but also have another workspace
Sometimes you can have two places of work, but what you determine as your ‘principal place of business’ will determine what home office expenses you can claim as a deduction.
For example, you are a dance teacher and you spend most of your time in your dance studio teaching, but come home at night and spend 3 hours in your home office replying to emails, creating invoices and social media marketing. So what can you claim?
The answer to this would be similar to an employee working from home - your dance studio is your principal place of business (this is where you generate/earn your income), so your home office isn’t where you spend most of your time. You could use either the Actual Method or the Fixed Rate Method (explained in more in depth above) to claim a deduction for work related running costs of your home.
The most important determination you need to make when you have two work spaces is what your principal place of business is. If it is not your home, like the example above, you can use the actual method or the fixed rate method, like a salaried employee working from home, to calculate your home office expenses deduction. If your principal place of business is your home office, this is classified as a home based business and you will be able to follow the guidelines on occupancy and running expenses (earlier in the blog) to claim your home office expense deduction.
Now, back to work… or home.
(and co-author, Caitie Copley)