Introduction
We are entering an EOFY like no other. Due to the Covid-19 pandemic, many employees have been stepped down, working reduced hours or having their wages supplemented by JobKeeper / JobSeeker payments. Hence managing cash is an important priority for most families.
In order to contain the spread of the virus, many organisations initiated work from home protocols for their staff. To many, this means that they will no longer be able to claim work related travel or clothing / laundry expenses. The lack of such deductibles will increase tax payable for most individuals (assuming their salary / wages has not reduced).
While the above expenses cannot be deducted for tax purposes, people working from home would have incurred expenses related to setting up a home office and also have to pay higher than usual bills related to lighting, heating, cleaning, internet etc.
To support the work from home transition, the ATO introduced a temporary shortcut method for calculating work related expenses. As listed below, there are currently three methods to compute tax deductible expenses. N.B. The latest addition is only a temporary scheme applicable from 1 st March to 30 th June 2020.
- Shortcut method (80 cents) – only available 1 March to 30 June 2020
- Fixed rate method (52 cents)
- Actual Cost method
It is important to understand the pros and cons of each of these methods to claim the maximum possible deduction when filing your tax return.
A useful outline of each method is provided below.
Expenses you cannot claim
Before we deep dive into the 3 methods, it’s important to highlight that the ATO has clearly specified expenses which cannot be deducted even if you’re working from home:
- Expenses incurred for coffee, tea, milk and other general household items your employer may otherwise have provided you with at work
- Expenses related to children and their education including setting them up for online learning, teaching them at home or buying equipment such as iPads and desks
- Expenses you’re reimbursed for, paid directly by your employer or the decline in value of items provided by your employer – for example, a laptop or a phone.
- Occupancy related expenses such as rent, mortgage interest, water and rates.
1. Shortcut method
Under the shortcut method you can claim 80 cents per hour for each hour you’ve worked. Hence an individual who has worked 40 hours per week will be able to claim $128 per month. This amount will have to cover the following expenses:
- Electricity and gas for heating, cooling and lighting
- Phone expenses
- Internet expenses
- Decline in value of equipment and furniture
The advantages of using this method are its simplicity and the fact that you do not need a dedicated office space to make this claim. However, the individual is expected to maintain a record of number of hours worked.
The disadvantage of this method is that $128 per month may not cover the actual additional cost that is incurred, since no further expense deductions related to working from home is permitted.
Hence it may be appropriate to consider one of the other options to maximise tax deductible expenses.
2. Fixed rate method
The fixed rate method allows an individual to claim 52 cents for the following expenses:
- Electricity and gas for heating, cooling and lighting
- Decline in value of home office furniture and furnishings e.g. a desk, chair etc.
- Cost of repairs to home office equipment, furniture and furnishings
To make a claim under this method, you need to have a dedicated work area, such as a home office. It is also important to keep records of actual hours spent working at home or a diary for a representative four week period showing your usual work from home pattern.
In addition, an individual can separately claim the following expenses related to work:
- Phone expenses
- Internet expenses
- Computer consumables and stationery – such as ink
- Decline in value of equipment – such as phones, computers and laptops
To claim above amounts, you need to have records as outlined below:
| Type of record | Details |
|---|---|
| Evidence e.g. receipts, bills etc. | To prove that expenses have been incurred or assets purchased. N.B. You may be able to claim small expenses ($10 or less) totalling up to $200, even without written evidence, provided you keep a record of same |
| Listings (where possible) | To justify the home / office expense split e.g. phone records identifying work- related calls and private calls |
| Log or diary for a representative four-week period | This is to indicate usual pattern of working at home which can be used to identify time spent as well as usage of assets / internet for official purposes (which can be claimed) |
3. Actual cost method
The third option available is to use the actual cost method to claim the additional running costs directly incurred as a result of working from home.
The list of expenses which could be claimed is almost the same as the list permitted under the fixed rate method, expect for the following:
| Expense item | Difference from fixed rate method |
|---|---|
| Cleaning expenses (if you use a dedicated area for working) |  Permitted under the actual cost method Not permitted under the fixed rate method |
| Cost of repairs to home office equipment, furniture and furnishings | Not permitted under the actual cost method Permitted under the fixed rate method |
The records you need to maintain are similar to the fixed rate method.
You will need to be more careful when computing the amount to be claimed, as you will be using actuals (as opposed to a fixed rate per hour for electricity etc.)
You will also need to consider use of space by other family members if a dedicated home office has not been set up) when claiming under this method.
Conclusion
The 2019-20 tax filing will be very different to previous years. While some expense types would not have been incurred, and hence cannot be claimed, the ATO is expecting a surge in home office related expense claims. Hence its important that accurate records (le.g. diary entries) are maintained, and evidence based logical calculations are performed to justify the amounts included in the tax return.
Please speak to us if you have any doubts or clarifications regarding which expense items to claim or how to compute them.