Ticking all the boxes at tax time

By Christine Peacock

The first of July is the start of a new financial year and with more employees working from home during the COVID-19 pandemic, there is increased interest in what expenses taxpayers can claim deductions for.

Like last year, taxpayers will need to submit their tax return to the Australian Taxation Office (ATO) by 31 October, unless lodging returns through a registered tax agent.

Some information, including employment, interest income, private health insurance, and government benefits may be pre-filled in the ATO’s online myTax facility. It’s important to check that this information is correct and that all relevant information has been filled in. It’s also pertinent to consider what deductions you might be entitled to claim.

Eligible taxpayers have a choice between using different methods to calculate their work from home expense deduction claims, dependent on when they incurred these costs.

There are important factors to consider when choosing which of these methods to use.

Short cut method

From 1 March this year, the ATO introduced a temporary shortcut method that can be used to claim working from home deductions. This method will be available to use in relation to hours spent working from home until 30 September this year.

Taxpayers using this method may claim 80 cents per hour for each hour that they work from home. An advantage of using this method is that it is relatively simple. Taxpayers do not need to have a dedicated home office to claim work from home expenses under this method. They just need to keep a record of hours spent working from home and do not need to keep bills and receipts to make a claim.

However, the simplicity of this method needs to be weighed against the fact that taxpayers who use this method cannot “double-dip” by also claiming deductions for running expenses which relate to working from home, such as phone and internet expenses, and also they cannot claim costs in relation to purchasing furniture and equipment. The 80 cents per hour is all-inclusive of what taxpayers can claim under the short cut method.

Fixed rate method and actual cost method

There are two other methods which can be used to claim working from home deductions. These methods have both been available to taxpayers for some time. They are the fixed rate method and the actual cost method. For working from home expenses incurred from 1 March to 30 September this year, taxpayers can choose to use either the shortcut method, fixed rate method or actual cost method, whereas taxpayers can only choose between using the fixed rate method and the actual cost method in relation to claiming working from home expenses in the period 1 July 2019 to 29 February 2020.

Taxpayers using either the fixed rate method or the actual cost method may be eligible to claim deductions for phone and internet expenses as well as stationery costs. They may also claim an immediate deduction in relation to furniture and equipment which cost $300 or less, or otherwise, they may claim depreciation deductions in relation to the cost of furniture and equipment which cost over $300.

The only difference relating to what is deductible when using these two methods is that in addition to these expenses, taxpayers who use the fixed rate method may claim a deduction of 52 cents per hour that they work from home, whereas taxpayers using the actual cost method may claim deductions for additional running costs as a result of working from home such as electricity and gas.

These running costs must have been incurred so as to earn income, and the total expenditure incurred in relation to these costs must be greater than it would have otherwise been if the taxpayer was only using their home for personal purposes. To prove this, it is best that a taxpayer uses a separate area of their home for work purposes, such as using a room of their home as a home office.

Taxpayers claiming under either the fixed rate method or actual cost method need to be able to establish that the expenses that they are claiming have a direct connection to earning their income. For example, they would only be eligible to partly depreciate a computer if it is used both for work purposes as well as for personal purposes.

They should also keep a record of hours of work at home, or base their claim on a record of hours of work at home over a representative month. It is important to keep receipts and records of calculations to substantiate claims. Taxpayers should also be mindful to only claim for costs that they have incurred and have not been reimbursed for by an employer.

If taxpayers are using their home as their place of business, taxpayers using the actual cost method may also be able to claim a deduction for a proportion of their occupancy expenses such as rent or mortgage interest. However, if they own their home and have an area of it that they use specifically for business activities then they should be careful about potential impacts on their ability to claim the capital gains tax main residence exemption when and if they one day sell their home.

A final word…

In some cases, taxpayers may be able to claim higher amounts under either of the two other alternative methods as opposed to what they can claim as work from home expenses under the short cut method.

Taxpayers who were working from home before 1 March 2020 may consider using either the fixed rate method or actual cost method in relation to hours spent from home in the period 1 July 2019 to 29 February 2020, and then either continuing on with using their original chosen method or switching to use the short cut method from 1 March 2020.

It is important to be mindful that in their 2019/20 tax returns, taxpayers can only claim under these methods in relation to time spent working from home up to 30 June 2020. While the shortcut method will remain available to use until 30 September, and taxpayers should continue to keep records of hours spent working from home in this new 2020/2021 financial year, taxpayers will not be able to claim for deductions in relation to time spent working from home from 1 July 2020 until after 30 June 2021.

Christine Peacock is a law and tax lecturer in the Federation Business School. She has significant industry experience, including previously working as a Director at a large professional services firm. Christine has previously advised clients in a range of sectors, and has also worked in the Asia Pacific region and Europe.

Please note that the above information is of a general nature, and does not take into account any taxpayer’s personal situation. It is important for you to consult with a registered tax agent if you require personal advice.