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The COVID-19 restrictions have seen a significant proportion of society working from home and, for some people, it has been their first time doing so.

While the focus of work-from-home arrangements has rightfully been about how to make them safe and effective (and in many cases, how best to juggle other challenges such as home schooling), it is also good to know that from a tax perspective, there are some worthwhile claims that are available.

In this blog post, we’ll discuss:

• the different types of expenses you can claim;
• how to calculate your claim; and
• your record keeping requirements.

Running Expenses

If you are an employee or business owner working from home, you may be entitled to claim running expenses such as:

• electricity
• gas
• telephone
• internet
• depreciation on computers and other equipment (e.g. chairs, desks, filing cabinets)

Additionally, if you have a dedicated area set aside exclusively for work purposes (i.e. not just a spare room which your family treats as a computer room or a lounge room that you do work in) then you may also be entitled to claim costs specific to that area of the house which could include, for example, depreciation of curtains, carpets, light fittings, etc.

Occupancy Expenses

For business owners, if you have a “home-based business”, you may also be able to claim occupancy expenses such as:

• mortgage interest
• rent
• insurance
• rates.

A home-based business is one where your home is also your principal place of business – that is, you run your business at or from home, and have a room or space set aside exclusively for business activities.

A home-based business can be run:

• at home – that is, you do most of the work at your home. An example is a dressmaker who does all their work at home, with clients coming to their home for fittings.
• from home – that is, your business doesn’t own or rent a separate premises. An example is a tiler who does all their work on clients’ premises but does all their record keeping, and stores all their tools and supplies, at home.

How to claim running expenses

In respect of running expenses, there are basically three methods of claiming:

• Method 1 – the shortcut method. This method is only available for the period from 1 March 2020 to 30 June 2020 (unless the ATO decide to extend this time frame). Under this method, you claim a flat rate of 80 cents per work hour which is said to cover all running expenses.
  
• Method 2 – the fixed rate method. Under this method, you claim all of these:
  • a rate of 52 cents per work hour to cover heating, cooling, lighting, cleaning and depreciation of office furniture;
  • the work-related portion of your actual phone and internet expenses, computer consumables, stationery, etc.;
  • the work-related portion of depreciation on a computer, laptop or similar device. 
    
• Method 3 – the actual cost method. Under this method, you claim the actual work-related portion of all your running expenses.

Indeed it may be the case that you use more than one method during the 2019/20 financial year. For example, you could choose Methods 2 or 3 for the period July through February, and then choose Method 1 for the period March through June.

How to claim occupancy expenses

In respect of occupancy expenses, your claim will need to be based on a percentage that reflects the portion of your house that can be reasonably be attributed to the home-based business.

That percentage is then multiplied by the actual occupancy expenses to arrive at your tax claim.

Record keeping Requirements for Running Expenses

If you are using the shortcut method, a record can be kept of your hours worked from home, or a diary kept for at least four representative weeks to record the amount of time your home is used for work purposes.

By way of illustration, if as a result of COVID-19, 30 hours of your working week is conducted at home for 10 weeks between 1 March 2020 and 30 June 2020, $240 can be claimed as a deduction (30 x 10 x $0.80) under this method.

If you are using the fixed-rate method, then:

• in terms of the component of this method that provides a 52 cents per work hour claim to cover heating, cooling, lighting, cleaning and depreciation of office furniture, then once again a diary should be maintained for at least four representative weeks to record the amount of time that your home is used for work purposes; and
• in terms of the component of this method that provides a claim for the work-related portion of various other costs, records should be maintained to reasonably demonstrate how you have arrived at your work portion.

If you are using the actual cost method, then like the second component of the fixed-rate method, records should be maintained to reasonably demonstrate how you have arrived at your work portion.

There is an administrative short-cut when dealing with mobile phone usage, with a standard $50 fixed deduction per year being allowed. Otherwise, an apportioned deduction based on actual expenses is required. Again, this can be quite involved, requiring a diary to be kept for a representative four-week period.      

Record keeping Requirements for Occupancy Expenses

As mentioned earlier, your claim will need to be based on a percentage that reflects the portion of your house that can be reasonably be attributed to the home-based business.

A detailed explanation of the basis of apportionment (such as floor space used for work purposes relative to total floor space in the house) should be kept with your records.

It should also be noted that if you do claim occupancy costs, upon the eventual disposal of your home, the capital gains tax exemption that normally applies to the sale of one’s own home will be affected. The portion of your home that is designated as a home-based business coupled with the period of ownership where that has been the case will be used to determine the percentage of any capital gain that will be taxable (as opposed to being exempt).

Darren Hagarty is a director of PT Partners. Thank you also to Josh McMullen, Senior Tax Writer at PT Partners, for his contributions.