It’s becoming more and more common for people to spend at least a small portion of their time working from home. For this reason you may be entitled to claim deductions in your tax return for home office running expenses or home office occupancy expenses.
But there is a distinct difference between the two claim types, as well as very precise circumstances under which each may be claimed. The ATO are keeping a close eye on the deductions which taxpayers are claiming for working from home, so please take the time to understand what you can claim and what you cannot.
Home office occupancy versus home office running. What’s the difference?
Home office occupancy expenses include those that are directly associated with your home:
- Mortgage interest
- Council rates
- House insurance premiums
Home office running expenses include expenses such as:
- Home office furniture and equipment (costing up to $300)
- Depreciation on home office furniture and equipment (for items costing more than $300)
- Cost of repairs to your home office furniture and fittings
- Cleaning expenses
- Work-related phone calls (including mobiles) and phone rental (a portion reflecting the share of work-related use of the line) if you can show you are on call, or have to phone your employer or clients regularly while you are away from your workplace
The ability to claim these expenses depends on whether your home is your place of business or simply a place of convenience to undertake work, with a room set aside exclusively for work activities.
Who can claim home office occupancy expenses?
Home office occupancy expenses are most commonly claimed when part of your home has the character of a place of business. If you are self-employed your home will likely be considered a place of business. The following factors indicate that an area set aside at home has the character of a place of business:
- The area is clearly identifiable as a place of business
- The area is not readily suitable or adaptable for private or domestic purposes in association with the home
- The area is used exclusively or almost exclusively for carrying on a business
- The area is regularly used for visits from customers or clients (if applicable)
As an employee, generally you can’t claim a deduction for occupancy expenses. However, if you are an employee and your employer has not provided you an office or location to perform your work, then home will indeed be your place of work (sole base of operations). In that situation you may be able to claim home occupancy expenses as well as home running expenses. You will need to be able to demonstrate that the room set aside for work was used exclusively or almost exclusively for income-earning purposes.
Who can claim home office running expenses?
Home office expenses are deductible even if a taxpayer chooses to use their home office for work purposes for their convenience, as long as the area is used exclusively for work purposes. The following table outlines the deductions you claim for the three possible ways you work may work from home:
How do I claim home office deductions?
Based on Taxation Ruling TR 93/30 and the ATO’s document “Home-based business” you can choose one of the four apportionment methods detailed below. The method you choose is entirely up to you; but we recommend that you select the most reasonable method for your particular circumstances.
Method 1. The 45c per hour method
This is by far the simplest method. It's designed to cover heating, cooling, lighting and depreciation of office furniture. It doesn’t include the depreciation of other office equipment such as computers and computers - these will be included in your tax return separately. The 45 cents per hour method It is based on an actual or established pattern of use.
Method 2. Cost per unit of power used
The ‘cost per unit’ method is great method for working out the additional utility costs that you have incurred due to working from home. With the correct documentation in place, it would be difficult for the ATO to argue this method in a tax audit situation.
Cost per unit of power x Average units used per hour x Total hours use for work purposes
Method 3. Comparing utility accounts
This method is also good for working out the additional utility costs that you incur as a result of working from home - as an employee or business. Simply compare utility accounts from before and after the home-based work activities commenced.
Method 4. Floor area
This method can be appropriate in certain circumstances, but generally only where the relevant area of the home is set aside exclusively for work or business purposes. We don’t recommend this method for employees who choose to work at home for convenience. What's more, the ATO have also indicated on many occasions that it's not always the most appropriate method.
What records must I keep?
In an audit situation, the ATO are very finicky over home office expense substantiation. You must be able to provide evidence to justify any deductions claimed for home office expenses. Please ensure you keep detailed records such as:
- Receipts or other written evidence of your expenses, including receipts for depreciating assets you have purchased
- Diary entries you make to record your small expenses ($10 or less) totalling no more than $200, or expenses you cannot get any kind of evidence for, regardless of the amount
- Itemised phone accounts from which you can identify work-related calls, or other records, such as diary entries (if you do not get an itemised account from your telephone company)
- A diary you have created to work out how much you used your equipment, home office and phone for business purposes over a representative four-week period.
But a word of warning: Where you have a regular pattern of home office use, a 4-week representative diary should be sufficient. But where there is no regular pattern of home office, you are required to keep a record of each and every time the work area at home is used exclusively for work-related purposes.
You may be interested to know that the ATO provides a Home Office Expense Calculator on their website which you can use to support your home office expense claim in your personal tax return. We strongly recommend that you use this and have a go at calculating your home office expenses before preparing your tax return or meeting with your tax agent.
Determining the deductibility of home office expenses can be quite involved when considered in the context of your specific occupation and employment contract details.