The rules for claiming home office expenses

Approximately one in three Australians regularly work from home, according to a 2016 report by the Australian Bureau of Statistics. That figure has skyrocketed in the past few weeks with many employers directing staff to avoid the office to minimise the spread of the Coronavirus.

Those who regularly work from home will know the various home office tax deductions. However, if you suddenly find yourself working from home at this time, this article provides a concise summary of what you can claim. It also outlines recent changes to the rules around claiming running expenses, due to the Covid-19 situation.

According to the Australian Taxation Office, there are three working-from-home categories:

• Category 1: Your home is your principal place of work and you have a dedicated working area that is unlikely to be suitable for domestic use;
• Category 2: Your home is not your principal place of work but you have a dedicated working area; and
• Category 3: You WFH but do not have a dedicated working area; for example, you use a room with a dual purpose.

Table 1 outlines the potential deductions for each category.

Note: A dedicated work area does not necessarily mean a separate room. There simply needs to be a reasonably clear division between the space for work versus domestic use.

Phone, internet and asset depreciation

All three categories are generally eligible to claim work-related expenses such as phone and internet, plus asset depreciation.

To do so, you must monitor, record and separate work from personal use.

Unfortunately, coffee is not typically treated as a deductible expense. Food and drinks are largely treated as entertainment or private expenses, neither of which are tax deductible.

There are two ways to calculate the work-related component of your phone and internet:

• For incidental use, you can claim up to $50 per financial year with limited documentation; or
• Estimate your actual work-related usage.

To claim a deduction of over $50, keep records for a four-week representative period each financial year, making note of work-related internet data usage and the number and duration of work calls.

At the end of the four-week period, the percentage of work calls and/or data usage can be used to apportion your total phone and internet bills for the full year.

All three categories can also claim asset depreciation on items such as computers, printers and furniture. To do this, keep receipts of the depreciating assets you purchased, determine the percentage those assets were used for work and determine the annual decline in value.

Running expenses

Category 1 & 2 can also claim the work-related proportion of their home running expenses including:

• Heating, cooling and lighting;
• Repairs to home office equipment and furniture;
• Cleaning costs;
• General expenses such as stationary, printer cartridges; and
• Home / office equipment like computers, printers, telephones, furniture and furnishings.

For equipment, the following rules apply:

• Full cost of items up to $300; and
• Decline in value for items over $300, or where a set of related items is over $300 in total and meant to be used together (e.g. two computer monitors worth $200 each).

In response to Covid-19, the government recently simplified the rules around claiming a deduction for running expenses for the period starting 1 March 2020 to 30 June 2020 (see breakout). These changes are explained below, however, ordinarily there are two main ways to calculate your running expenses:

1. Claim a fixed rate of 52 cents per hour; or
2. Calculate your actual expenses.

The fixed rate method is the easiest and the most commonly applied. It is likely to be the most practical option for those temporarily working from home.

To claim using this method simply record the actual hours you spent working from home for the year. To prove this, you will need to keep a diary that reflects a typical four-week period.

Calculating actual expenses is trickier. In addition to recording the number of hours spent working from home you must also:

• Determine the floor area of your dedicated working space as a percentage of the entire house in order to accurately calculate the WFH component of household cleaning expenses
• Work out the cost of heating, cooling and lighting
• The cost per unit of power
• Average units used per hour
• Total annual hours used for work-related purposes 
• Keep utility bills and receipts for absolutely everything

Running expenses during Covid-19

The Australian Taxation Office will temporarily be accepting a simplified approach for claiming a deduction for running expenses for the period starting 1 March 2020 to 30 June 2020.

The two main changes are:

1. An adjustment to the fixed method of calculating running expenses with the fixed rate increasing to 80 cents per hour, up from 52 cents. This fixed rate includes phone and internet bills during this period. Computer consumables, stationery and decline in value of computer equipment are also included here
2. An extension of eligibility criteria to include those who work from home but do not have a dedicated working area. For a short window, people in all three working from home categories will be able to claim the work-related proportion of their home running expenses.

Depending on the circumstances, some people may still be better off claiming under the normal rules, which are still an option.

If you decide to apply the Covid-19 changes, you (or your tax agent) will need to stipulate the “Covid-19 hourly rate” in your 2019/20 tax returns.

The ATO has signaled that it may extend the changes beyond 30 June 2020, depending on when work patterns start returning to normal.

Occupancy expenses

The ability to claim a deduction on occupancy expenses, such as rent, mortgage interest, council rates, property insurance and land tax, is restricted to people in Category 1.

The rules are particularly complex but if your home doubles as your principal place of work and you have a dedicated space that is unlikely to be suitable for domestic use, you may be eligible.

An example of this could be a doctor who has a dedicated examination room in their home.

If you are an employee who usually goes into an office but are temporarily working from home due to Coronavirus, it is unlikely that you will be able to claim on occupancy expenses.

The formula for determining occupancy expenses is:

Total expenses × floor area × % of year that part of your home was used exclusively for work

For example, if the area used exclusively for work takes up 20% of your home and you used it for an entire year, you can claim 20% of your occupancy expenses.

Homeowners should be mindful that if they claim occupancy expenses, they do not qualify for the Capital Gains Tax (GCT) main residence exemption for the part of your home used for work. Therefore, there may be CGT implications when they sell that property.

Additional considerations for home-business homeowners

Given the high hurdles, only a small percentage of people who WFH claim a deduction for occupancy expenses.

For home-business homeowners, the rules are even more complex because of the potential CGT tax consequences (as mentioned above).

Home-business homeowners who claim a deduction for occupancy expenses for a period of time, say three years, will only pay CGT on any capital appreciation for that period, upon the sale of their home.

For example, if you purchased your home in 2010 for $1 million; started WFH in 2016 in a home office that represented 10% of your floor area; ceased WFH in 2019 and sold your home in 2020 for $2 million, the ATO will treat this situation as if you bought the property in 2016 (the year you started WFH).

If your home was valued at $1.6 million in 2016 then the asset appreciation up until that point, in this case $0.6 million, will be CGT exempt.

Since you only WFH three of the past four years, 25% of your $0.4 million nominal capital gain is tax exempt. Furthermore, given you only claimed occupancy expenses for 10% of your mortgage interest and rates etc, you only need to apportion that percentage to the remaining $0.3 million capital gain. In this case, the capital gain is reduced to $0.03 million.

Needless to say, the rules are extremely complex which is why it is important to seek professional advice if you are seeking to claim home office expenses.

If you would like any further information about the home office tax deductions that may be available to you, please contact Riady Haryono on 02 9222 1422.