Today let’s talk about housework – working from the house that is, not cleaning the house!
Working from home has never been easier or more convenient – super fast broadband (for some!); reliable technology and long commutes mean that for many employees, it’s an attractive option. And with the rise of the gig economy and many choosing to go solo with the benefits of being your own boss, it’s super important to maximise your home office expenses and not fall on the wrong side of our friends at the Australian Taxation Office (ATO). Today, we will aim to do all that and leave you with more time to relax (who cares about the housework!).
There are two distinct types of claims:
- Employees who regularly work from home either for convenience or because your employer requires you to.
- Running a business from home – an office, workshop or consulting room which is set aside and used exclusively for business activities.
The first case is probably the most common. Under this scenario, you are generally not able to claim occupancy costs (rent, mortgage interest, insurance, rates etc). If you own your home you also are not subject to capital gains when you sell your home – the main residence exemption still applies.
What you are able to claim will depend on whether or not you have a dedicated work space which is used exclusively for work activities. In all cases, you are able to claim the additional expenses associated with working from home. This includes phone and internet; decline in value of a computer and other office equipment, running expenses such as power for lighting, heating and cooling, and consumables such as printer ink, paper and stationery . If you have a dedicated work space, you may also be able to claim a deduction for certain fixtures such as curtains, carpets etc.
That all seems pretty straightforward, so how you calculate your claim? There are two methods – Actual cost or a fixed rate.
If you have a dedicated work area, the first step is to calculate the floor area of the space as a proportion of the total floor space of the home. Next, calculate the percentage of the year you use the space exclusively for work. You must reduce this percentage if the space is also used by other members of the household. This will enable you to calculate the percentage of time your home is used over the year for your home office (your work related percentage).
Next, record the total costs of running your home – lighting, heating, cleaning, electricity etc.
The final step is to apply the work related percentage to total costs to determine the amount you can claim.
If you do not have a dedicated work space, you are still able to claim based on actual costs, however it’s more difficult to substantiate. In a nutshell, you will need to determine the actual cost of running each unit you used per hour and multiply that by the hours that you spent working from home. Of course, if someone else is using the space at the same time, you must take this into account!
If that all sounds pretty complicated, let’s move on to the fixed rate method. Simply put: multiply the fixed rate (for the 2019 financial year this is $0.52) by the number of hours you work from home. This method takes account of all items you can claim including electricity, cleaning and the decline in value of furniture. But the only substantiation requirement is that you keep a diary of the hours you spend working at home and apply for the full year (eg if you work from home one day per week, you can claim 7.5 hours per week – excluding any leave).
In addition to the costs of the space you use, you are also able to claim a proportion of phone and internet expenses. You can do this on an actual method (by going through your itemised bill); a set rate per phone or telephone call made (eg $0.75 per call from your mobile) or if you have a bundled plan, you can keep a diary or log book for a four week period. This will establish you “business use percentage” which you can multiply by the actual cost of the phone or internet service for the entire year.
If you are running a business from home, all the above still applies. However you are also able to claim a percentage of occupancy costs (such as rent or mortgage interest; water, council rates, insurance etc). The only method available is actual cost. You must calculate the area used for the business as a proportion of the total home and apply to total expenses. Note if the personal services income (PSI) rules apply, you are unable to claim occupancy costs. You can read more about PSI here. Another hidden trap if you are able to claim occupancy costs, is that you will no longer be able to claim a full main residence exemption when you sell your home as it is being used to produce assessable income.
If you have further questions about claiming home office expenses, I’m more than happy to chat with you and offer a FREE 30 minute initial consultation. You can easily book online here and I look forward to helping you sort your taxes!