Superannuation

Tax deductions and working from home during COVID-19

By Graeme Colley
Executive Manager, SMSF Technical and Private Wealth - SuperConcepts Sydney, Australia

Did you know that one in three employees claims a tax deduction for work expenses for work done away from their employer’s workplace? With the explosion in the numbers of people now working from home due to COVID-19, the situation has changed significantly.

The ATO says that in the past, claims for ‘home office’ expenses were relatively small for work occasionally done at home, such as at weekends, in the evenings, or when staying home to let a tradie in etc. But now that we are required to self-isolate it looks like working from home is on a semi-permanent basis until the danger of the pandemic is over. So what’s to know if you’re going to make a tax claim for home office expenses? There are two methods you can use:

  1. the simpler short cut deduction method which was recently announced by the government and applies from 1 March to 30 June this year, or
  2. claiming a proportion of the running expenses of your home office.

The short-cut deduction method

The short-cut method allows you to claim a rate of 80 cents for each hour you are working from home providing you are not reimbursed by your employer. You will need to keep a record of the hours in support of your work from home. Have something on your computer or a small book in which you record the date, the time you spent working and the total hours worked on that day. That should be enough to keep your tax agent and the ATO happy.

The short-cut method is only available due to the COVID-19 pandemic for work you do at home from 1 March until 30 June. So if this is the first time you’ve ever worked from home it may be a simple an easy way of claiming the deduction. The alternative, if you wish, is to use the proportion of running expenses method during this time which may require you to keep much more detailed records as you will see.

The proportion of running expenses method

The running expenses method is the usual way of calculating your home office costs for tax purposes. If you have been using this method in the past it may be just as easy to continue with it rather than change to the short-cut method which we hope will last for a short period. It’s totally up to you and your tax adviser.

There are two methods of calculating your home office running expenses if you use the running expenses method. The first is the fixed rate method of 52 cents per hour, which is similar to the way you would calculate the deduction under the short cut method. The second is to use the actual expenses method but it can be used only if there is a dedicated area set aside as your home office.

What you can claim

Under the actual expenses method you are entitled to claim a proportion of the running expenses for your home office. Expenses can include a proportion of:

  • Heating, cooling and lighting bills,
  • Costs of cleaning your home working area,
  • Depreciation of home office furniture and fittings,
  • Depreciation of office equipment and computers,
  • Costs of repairing home office equipment, furniture and furnishings,
  • Small capital items such as furniture and computer equipment costing less than $300 can be written off in full immediately without being depreciated,
  • Computer consumables such as printer ink and stationery,
  • Mobile and/or landline phone and internet expenses.

Ideally, you should have a specific room set aside as a home office, such as a study. If you are using a room with more than one purpose you can only claim the expenses for the hours the area was used exclusively as your work office. Examples could include a dining room, or a room shared with others such as a sunroom or lounge room.

Case study one

Frances is a teacher and has a separate study which is used to prepare lessons, student reports and mark exams on her computer. She will be entitled to a proportion of the expenses that are for the work-related use of her study. This would include laptop depreciation, internet and phone expenses relating to her work and depreciation of her study furniture. Rather than use the actual expenses method she may prefer using the fixed rate method of 52 cents for each hour she spends using her study as a home office.

Case study two

Ryan lives in a group house and does his work in the lounge room while everyone is watching television. He could not claim any additional costs of lighting, heating and cooling of the lounge room. But he could claim the estimated cost of electricity for use of his computer for the time spent on work related use as well as a proportion of the decline in value of the laptop connected with the work he does.

Phone and internet expenses

If you paid for any phone or internet expenses, you need to keep records to support any tax claims. The ATO accepts that if you wish to claim a deduction of more than $50 then you need to keep records for a four-week period which is representative of your spending throughout the year. To help you claim the deduction you’ll need phone and internet bills, (either paper or electronic) which identify work related and private calls and internet usage. As well, a diary of the time you worked from home will help your claim.

If your claim is no more than $50 the ATO allows 25 cents for each landline call, 75 cents for mobile calls and 10 cents for each text message you make that relates to your work. However, if your expenses are greater than $50 you will need to work out the approximate percentage of phone and internet over the 4-week representative period which can then be applied for the whole year.

If your usual work pattern changes significantly during the year because of an extraordinary event such as a flood, bush fire and now the COVID-19 pandemic you should keep records that help show the change.

What you can’t claim

If you work at home as an employee you cannot claim a deduction for any rent paid on the property, interest on any mortgage on your home, insurance, rates and land tax. Also, if you are claiming expenses for your home office there are no capital gains tax implications. In contrast, if you were running a business from your home capital gains tax may apply if you claimed occupancy expenses such as rent, mortgage interest etc. If this occurred, you would not be entitled to the full main residence CGT exemption on your home.

Keeping records

To help you at tax time you really need to record the expenses relating to your home office throughout the tax year. Here’s what you should try to keep:

  • a diary for a four-week period which you think is typical of your use of the home office for the whole year;
  • written receipts of your expenses and depreciating assets that you have purchased such as computers, office chairs and desks. It may be useful to scan the receipts in case the writing fades by the time you get around to getting your tax information together;
  • diary entries of small expenses ($10 or less) and no more than $200 in total that you may not be able to get evidence for;
  • itemised phone accounts so you can show which calls were for work and private purposes or a diary which shows the purpose of the calls.

Making tax time easier

The best thing with home office expenses is to understand what you can claim and how to claim home office expenses for tax purposes. Will you use the short-cut deduction method or the proportion of running costs method? The most important thing is to keep records of the time you spend working from home and the costs associated with it. Trying to recreate things when tax time arrives may end in a lower tax deduction than you deserve as you try and remember what you spent and when you worked at home.

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Graeme Colley, Executive Manager, SMSF Technical and Private Wealth, SuperConcepts
  • Covid-19
  • Multi-Asset
  • Regulation
  • SMSF News
  • Superannuation
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