What to do in order to claim a deduction for working from home due to Covid-19
Recently we were asked to provide comment to an ‘Adviser Ratings’ enquiry – What do I need to do in order to claim a deduction for working from home due to Covid-19. Adviser ratings response
Not only is this a great question in general, it’s one that has become quite topical given tax time is fast approaching and social distancing rules have forced many to work from home.
Generally speaking, those who work from home may be able to claim a deduction for expenses incurred in order to carry out their job, with these expenses ranging anywhere from the additional electricity costs of running your home office to the decline in value of your computer, phone or furniture.
Knowing that you can claim some of the expenses incurred back is great as it can help maximise your tax return for the year, however it’s important to know that there are some expenses you can’t claim such as:
- The purchase of general household items such as coffee, tea & milk, regardless if your employer would have otherwise provided them to you;
- Costs in which you’ll be reimbursed for by your employer; and
- Employees generally are unable to claim costs associated with occupancy such as rent, mortgage interest, water & rates.
Set up a dedicated work area
As a first step, when working from home you should ensure you set up a dedicated work area such as setting up an office in a spare bedroom. Not only will this improve your ability to focus when working, the Australian Tax Office (ATO) has different rules around what you and cannot claim as a deduction depending on whether you have a dedicated work area. As an example, you cannot claim the decline in value or depreciation of curtains, carpets and light fittings if you don’t have a dedicated work area.
Keep your receipts!
Another important thing to keep in mind is to retain your receipts or a record for any expense you intend on claiming as a deduction as the ATO will only accept deductions if you can reasonably show how you calculated your claims. You will need to retain these receipts for at least five years from when you lodge your tax return and they can be requested by the ATO during this time to substantiate your claims.
Types of deductions and how to figure out your deduction
When claiming expenses as a deduction for running a home office, the expenses can be broadly divided into two categories, running costs and occupancy costs. Running costs are those associated with the running of your office such as the electricity bills to heat, cool and light the office whereas occupancy expenditure is only applicable to those whose home is their usual place of work and include expenses such as rent and mortgage interest.
Assuming you’re only working from home due to Covid-19, it’s unlikely that you’ll satisfy the criteria to claim occupancy costs, as you would normally work at the office.
There are a few methods for claiming costs, including the ‘Fixed rate method’ and the ‘Actual cost method’, but specifically for Covid-19, the government has announced the ‘Time limited short-cut method’, which I’ll elaborate a little on first.
The time limited short-cut method
Under this method, you can claim 80 cents per hour for each hour you work between the 1st March 2020 to the 30th June 2020.
This method applies to expenses incurred due to working from home to fulfil your employment obligation and applies to running costs such as phone, internet, electricity and gas expenditure and the decline in the value of your office equipment. To make this claim, you aren’t required to have a dedicated work area however you will need to retain time sheet or diary as evidence for the hours worked.
This method only applies to hours worked between 1st march 2020 to the 30th June 2020, so any working from home arrangements you had prior to this period, you will need to use one of the traditional methods to calculate your deduction for the period 1st July 2019 to 29th February 2020.
Fixed rate method
The fixed rate method is a simple 52 cents per hour calculation where you multiply the hours you work during the financial year by 52 cents to get to your allowable deduction. For example, assuming you full time from home 48 weeks over the financial year, you would calculate your running cost deduction as follows:
$0.52 x 8 hours x 48 weeks = $199.68
Under this scenario you would claim $199.68 in your tax return as an allowable deduction, just ensure that you have a record of hours worked to substantiate working from home during the financial year.
Actual Cost method
You could also use the actual cost method, which allows you to claim additional running costs you directly incur due to working from home such as an increase in electricity bills or a decline in value of your laptop.
To use this method, you need to be able to keep a record which is evidence of a pattern of use, which would include a diary that represents at least a four-week period over the financial year. You can then use the additional costs incurred during this period and apportion all your expenses during the financial year.
Any information provided here is general advice only and does not consider your objectives, financial situation or needs. This information should not be taken as comprehensive and does not constitute legal or financial advice. You should seek legal, financial or other.
This content is intended to provide only general information in summary form on tax matters of interest and is only current at the time of publication. This content does not constitute tax advice and should not be relied upon as such. You should seek tax, legal or other professional advice before acting or relying on any content.