Working from home: What can you claim and how do you claim it?

Some of you will have started to prepare your clients’ income tax returns for 2019-20, so it is timely to refresh our understanding of how this method interacts with the home office rules.

In fact, it means that there are now three ways of claiming working from home expenses in these two income years.

First, taxpayers can calculate certain portions of their additional running expenses by using a fixed rate. The fixed rate was set via Practical Compliance Guideline PCG 2020/3 at 80 cents per hour – the ATO calls this the “shortcut method”. This was introduced as a result of the large number of people working from home due to the COVID-19 pandemic.

Second, prior to the shortcut method being announced, the fixed rate was 52 cents per hour (as per PS LA 2001/6). This is, unsurprisingly, referred to as “fixed rate method” by the ATO.

There are important differences between the expenses that these two methods cover.

Third, taxpayers can calculate their additional running expenses by keeping records and written evidence to determine their workrelated proportion of actual expenses incurred (as per TR 93/30). The ATO calls this the “actual cost method”.

This is usually used where there is a home office. A classic example would be a doctor’s surgery or consulting rooms within a private residence. Again, there are differences between what expenses can be claimed under the actual cost method and the other rate per hour methods. We will deal with each in turn.

Shortcut method

This is dealt with first as it is likely that this will be the most widely used method, given so many more people are working from home who have not done so before, and who do not have the records or inclination to substantiate a claim under the other methods. In other words, it is simpler and easier.

To qualify, a taxpayer must be working from home and must incur additional running expenses. For example, if a home computer had only ever been used for private purposes and is now being used to fulfil employment duties or in running a business, it would be an additional running expense that is incurred.

The ATO states that minimal tasks such as occasionally checking email or taking calls while at home will not qualify as working from home. The work has to be “substantive and directly related to the taxpayer’s income-producing activity”.

PCG 2020/3 covers all additional running expenses, namely:

• electricity (relating to lighting, cooling/ heating and electronic items used for work, e.g. a computer) and gas (heating) expenses;
• the decline in value and repair of capital items (such as home office furniture and furnishings);
• cleaning expenses;
• phone expenses (including the decline in value of a phone handset);
• internet expenses;
• computer consumables;
• stationery; and
• the decline in value of a computer, laptop or similar device.

If this method is used, no other work from home expenses can be claimed.

Taxpayers do not need to have a dedicated area to use the shortcut method (unlike the other two methods, below). However, it does not apply to employees for any period they are on leave or stood down during the period, or business owners if they have ceased trading permanently.

The 80-cent rate applies from 1 March 2020 and will cease to apply on 31 December 2020. However, it may be extended beyond this date – depending, of course, on what happens with the virus.

Taxpayers will need to keep a record of the hours they have worked at home which can be in the form of timesheets, rosters or a diary. In terms of other records, all the ATO says is that it is “important” to keep the following, as taxpayers may want to combine methods or use a different method in later years:

• receipts for depreciating assets or equipment used when working from home;
• records of how the workrelated use of assets were calculated; and
• the decline in value calculations. Taxpayers who use the 80 cents rate must claim it in Item D5 “other workrelated expenses” in the 2019-20 income tax return.

Fixed rate method

The fixed rate method also applies to what the ATO terms “running costs”.

It is 52 cents for each hour worked at home and is intended to cover the following expense:

• the decline in value of home office furniture and furnishings – e.g. a desk;
• electricity and gas for heating, cooling and lighting; and
• the cost of repairs to home office equipment, furniture and furnishings.

Importantly, the 52- cent rate does not cover the following:

• phone expenses;
• internet expenses;
• computer consumables and stationery – such as ink; and
• decline in value of equipment – such as phones, computers and laptops.

If taxpayers want to claim for these expenses (and who wouldn’t), then they will need to calculate their workrelated use separately. This will require diaries, receipts, detailed phone accounts etc. This instantly makes it more complicated, of course.

To use the fixed rate method, taxpayers must have a “dedicated work area”, such as a home office.

In terms of hours worked, taxpayers must record actual hours worked, but there is an option to keep a diary for a representative four-week period. The four-week period can be extrapolated over the remainder of the year, which would work perfectly well in a normal year. However, the ATO advises that if work patterns change a new record will be required. It can only be assumed that the carnage that is COVID-19 would necessitate a new record for those who did the diary before March.

Actual cost method

We won’t spend a lot of time on this third category, as it is only of relevance to taxpayers who have a home office. Under the actual cost method, taxpayers work out their deduction from actual costs incurred as a result of working from home.

So, what is a home office?

The ATO states in TR 93/30 that the following factors may indicate that an area of the home has been set aside as a place of business (as opposed to a place of convenience):

• the area is clearly identifiable as a place of business and is regularly used for visits by clients or customers;
• it is used exclusively or almost exclusively for work purposes; and
• it is not readily suitable or adaptable for private or domestic purposes.

Importantly, if a place in a house qualifies as a home office, taxpayers can claim occupancy costs – mortgage interest (or rent), house insurance, water and council costs, repairs. Such costs will need to be apportioned, usually on the basis of floor area. However, claiming occupancy expenses may trigger a CGT liability when the home is sold.

The good news is that claiming via the 80 or 52 cents an hour methods – while not allowing a taxpayer to claim for mortgage interest – will have no impact on a person’s ability to claim the full main residence exemption when later selling their home.