Working from home has become something of a normality these past few years. Findings show that in February 2021 41% of the work force worked from home at least once a week as opposed to 24% pre-March 2020. Undoubtedly this increase in working from home has done a lot of good – no commute times, provided flexibility for many parents and caregivers and getting away from those co-workers who love to distract. Conversely though, working from home has caused a lot of issues such as parenting while working (who can forget the home-schooling weeks🫣🫣), finding the motivation to stay on task and being stuck with pesky partners all day.
One of the forefront issues with the increase in working from home, has been navigating the complex nature of claiming these expenses on a tax return. To make things as simple and applicable as possible, below is the Who, What, When, Where and Why (not in that order) of claiming work from home expenses on your tax return.
Why
First of all, understanding why the ATO has allowed taxpayers to claim for these expenses can make the process a bit simpler. Generally speaking, employers (that is, your boss) will pay for the electricity costs of running a workspace as it is a necessary expense for them to generate income. When it comes to moving the workplace to employees’ residences; home owners and renters are likely to notice an increase in their energy bills due to an increase in time spent at home.
Normally a taxpayer will spend at least 8 hours away from home per working day – that’s one third of the day where (assuming no one else is at home) energy consumption should remain pretty low. Now replace that with post-March 2020 living where taxpayers are at their poorly-lit kitchen tables with two lights on, A/C running, and their computer/laptop plugged in and you can understand why some taxpayers are surprised to see their energy bills increasing by an average $1,328 per year (😱). To make things fair (don’t be deceived, it’s still unfair, unless your employer pays your energy bills for you) the ATO has allowed individuals and small business operators to make a claim for the energy costs used whilst in pursuit of income generating activities.
Who
Claiming work from home expenses is available for all individual taxpayers. This includes the following: employees, contractors and small business operators (as a sole trader).
In conjunction with being one of the above, you must also be required to fulfil your income generating duties at home that causes you to incur additional expenses. Occasional checking of emails or updating timesheets doesn’t qualify a taxpayer for claiming work from home expenses.
If you operate as a company or trust then you qualify for claiming home office expenses in much the same way a workplace business owner would for a corporate office.
What
In a nutshell there are currently three different ways for an individual taxpayer to claim expenses related to working from home, officially known as ‘home office expenses’:
- Fixed Rate Method
- Shortcut Method
- Actual Expenses Method
All of the above methods can be used at different times throughout the year as long as two methods are not claimed for the same period. Extreme care needs to be taken when reporting these methods as usually there is so much more than just the electricity costs that are being claimed.
When
For this section I will interpret the ‘When’ to mean when are you eligible to claim home office expenses. The main things to remember with any deduction is that the expense:
i) must be used for business- or work-related income generating activities,
ii) must not be reimbursed to you,
iii) must be apportioned if it has a private use,
iv) must not be capital in nature.
So, if you’re wondering whether you can claim home office expenses for reading the daily newspaper, you are probably wrong.
In conjunction with the overarching criteria above, the work from home provision also requires the following conditions to be met before a claim for home office expense can be claimed:
- A dedicated work area, or office. (If there are other people in the same room as your office while you work then this will not constitute a dedicated work area)
- A log of all the hours worked from home,
- A record of the additional expenses and their percentages related to their work-related use.
The time frame available for claiming the work from home expenses go back as far as 2001 and extends until the current year. Special COVID work from home rates applies from 1 March 2020 – 30 June 2020 as well as the entirety of the 2021 and 2022 financial years.
Where
Home office expenses are claimed as other work-related expenses at item D5 on the tax return.
Conclusion
Understanding more about the principles behind the home office deductions allows for a greater understanding in how they are calculated. In the next part of this article, we delve more into the calculation of these methods and which one can be most beneficial to your situations. Getting the calculations right can be the difference between an extra $400 in your pocket, or even doubling the amount you initially thought was tax deductible. Contact the team at Maurer Taxation today about any questions you may have.