A lot of people do some sort of work from home. It might be simply answering emails on the couch or working from home a few days a week. So, what can you claim if you’re putting in extra hours?
For a while now, the Australian Taxation Office (ATO) has been concerned about tax deductions individuals have been claiming for a whole host of expenses. The latest on their ‘hit list’ are home office expenses.
While the ATO appreciates that technology has led to more people working from home and greater flexibility, they don’t believe that all of the claims being made for home office expenses are legitimate.
A major bugbear for the ATO are the people who claim 100% of their expenses like mobile phone plans and internet services when they are
mostly for personal use. If you claim 100% of your phone and internet and you are not running a business from home, you can expect the ATO
to look closely at your claims – that goes for subcontractors as well!
Working out the work-related portion of your expenses…
You need to be able to prove how you came up with your expense claim. This includes having a documented method of calculating the work related portion of that claim if the item you are claiming is used for private and work purposes. For phone and internet expenses for example, you might look at the number of work calls, the time spent, or data downloads as a portion of the total bill.
Another method is to complete the equivalent of a log book or diary over four weeks to track your work use of the item, then apply the work percentage over that four weeks to your annual expense. If for example you used your phone for 20% of the time over the four weeks you documented in your diary, you could then claim 20% of your annual phone expense as a home office expense (assuming your circumstances don’t change across the year).
Working from home Vs running a business from home…
A lot of people do some sort of work from home. It might be simply answering emails on the couch or working from home a few days a week. So, what can you claim if you’re putting in extra hours?
If you don’t have a dedicated work area but you do some work on the couch or at the dining room table, you can claim some of your expenses like the work-related portion of your phone and internet expenses and the decline in value of your computer. This of course assumes that your employer doesn’t reimburse you for your phone and internet expenses and you purchased your computer for yourself.
If you have a dedicated work area, there are a few more expenses you can claim including some of the running costs of your home such as a portion of your electricity expenses and the decline in value of office equipment.
If your home is your principal place of business, you might be able to claim a range of expenses related to the portion of your home set
aside for your business.
What the ATO is looking for is an identifiable area of the home used for business. Take the example of a hairdressing business that runs out of the hairdresser’s home. One room is dedicated as a salon and is not used for any other purpose other than the salon. For the portion of the house taken up by the salon, the hairdresser can claim running expenses such as electricity and the interest on the mortgage.
The downside to claiming occupancy expenses such as interest on a mortgage is the impact it has on your tax-free main residence exemption for capital gains tax (CGT) purposes. In general, your home is exempt from CGT when you sell it. However, if you use your home to earn assessable income like the hairdresser, then you might only qualify for a partial exemption on the sale. If you are claiming part of your home as a business expense, then it is unlikely that any gain you make on your home will be fully CGT-free.
What home office expenses can be claimed?
| 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. |
|
Running expenses | Yes | Yes | No |
|
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 |
|
Occupancy expenses | Yes | No | No |
Running Expenses
If you have a dedicated work area such as a study set aside for work, the essentials to keep the work area running like electricity, cleaning and office equipment be claimed as an expense. Of course, any claim can only be for the work-related portion of the expense. If your family use your home office as well or you use it for personal use, then you can only claim a portion of the expense.
Running expenses can be claimed at a fixed rate of 45 cents per hour or as an actual expense. To claim an
actual expense you need to document the total expenses for lighting, cleaning, heating and cooling for your home for the year, work 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 exclusively for work.
Occupancy Expenses
Expenses such as rent, interest on your home loan, property insurance, land taxes and rates can only be claimed if your home is your ‘place of business’ and no other work location has been provided to you. A place of business is unsuitable for any other use other than business, like a doctor’s surgery connected to a home or a hairdressing salon in a room of the house.
Occupancy expenses can be claimed by calculating your total expenses × floor area × percentage of year that part of your home was used
exclusively for work. Generally, occupancy expenses are not a deduction available to employees.
Work related phone and internet expenses
Unless you run your business from home and you have a dedicated phone and internet line it’s unlikely you can claim 100% of your phone and internet expenses. If your employer provides you with a phone, you cannot make any claim for these expenses. If you are a casual worker you cannot claim a deduction for phone rental expenses. For the rest of us, you can claimup to $50 for phone and internet expenses without substantiating the claim (but the ATO still might expect you to prove the claim), or you can work out your actual expenses.
Decline in Value
For depreciable assets such as computers and printers, you might be able to claim decline in value if the cost of the item was over $300.
Decline in value deductions might also be available for office furniture used for work purposes in a home office, but not if the individual
is using the fixed rate of 45 cents per hour to claim running expenses.
Talk to your tax advisor if you need help with claiming home office expenses.