Home Office Expenses
The ATO has reported that, in 2018, 6.7 million tax payers claimed a record $7.9 billion in deductions for ‘other work-related expenses’, which includes expenses related to working from home (i.e. home office expenses).
Along with this increase in the number of claims for home office expenses, the ATO has identified a high rate of errors and mistakes associated with making these claims. As a result, the ATO has advised that it will be increasing its attention, scrutiny and education for these claims in 2020.
Claims for Occupancy Expenses (e.g. interest, rates, insurance, etc)
Where a taxpayer uses part of their home for work or business, occupancy expenses can only be claimed where the relevant part (or area) has a character of a ‘place of business’. For example, this will be the case in the following two situations:
Area used to carry on a business – The area is set aside exclusively for the carrying on of a business by the taxpayer (e.g. a self-employed person). The following factors may indicate that an area set aside at a taxpayer’s 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 use for private or domestic purposes in association with the home generally.
- The area is used exclusively (or almost exclusively) for carrying on a business.
- The area is used regularly for visits of clients or customers.
Area used a sole base of operations – The area is used as the taxpayer’s ‘sole base of operations’ for income producing activities. This can extend the concept of an area in a taxpayer’s home having the character of a ‘place of business’ to those situations where the taxpayer may not be carrying on a business as suck (i.e. in the traditional sense)
However, in order for an area of a taxpayer’s home (e.g. a home office) to be considered a ‘sole base of operations’ , the taxpayer must show that, as a matter of fact:
- It is a requirement inherent in the nature of the taxpayer’s activities that the taxpayer needs a place of business (or work)
- The taxpayer’s circumstances are such that there is no alternative place of business (or work), thereby making it necessary to work form home (i.e. the taxpayer must be able to show that they are not merely working from home because it is convenient to do so) and
- The area of the home is used exclusively ( or almost exclusively) for income producing purposes.
Claiming Home Running Costs
Home office running costs (e.g. electricity, gas, cleaning and depreciation of office furniture and equipment) can generally be claimed where:
- part of a taxpayer’s home has the character of a ‘place of business’ or
- a taxpayer uses part of their home to do work as a matter of convenience.
On this basis, a deduction can be claimed for home office running expenses in a broader range of circumstances compared to home office occupancy expenses.
Calculating the deductible amount of additional running costs associated with working from home.
A deduction can only be claimed for the additional running costs incurred by a taxpayer as a result of carrying out work or business activities. The following methods may be appropriate in calculating a taxpayer’s deduction for home office running expenses, provided the method selected is reasonable in the taxpayer’s circumstances and the costs associated with any private use of the relevant area(s) used for work or business purposes have been excluded:
a) Floor area – It may be appropriate to claim some home office running costs based on floor area, but generally only where the relevant area of the home (e.g. a home office) is set aside exclusively for work/business (i.e. is not used for private purposes).
b) Comparing utility accounts – In order to work out the additional utility costs (e.g. electricity and gas) that are attributable to work/business, it may be appropriate to compare utility accounts from before and after the work or business activity commenced.
c) Cost per unit of power used – A ‘cost per unit’ basis may be appropriate to determine the additional utility costs associated with working from home, as per the following formula:
Cost per unit of power used x Average units used per hour x Total hours used for work purposes
d) The ’52 cents per hour method’ – The ATO advises that a deduction for heating, cooling, lighting (and depreciation of office furniture) can be calculated at the rate of 52 cents per hour for the 2019-2020 income year.
Documentary evidence guidelines to verify home office expenses incurred.
Whatever method is selected by a taxpayer to claim home office running expenses, the taxpayer must be able to provide evidence or documentation to justify the deductible portion claimed. the following documentation requirements would
generally be expected by the ATO (refer to the ATO’s document: “Home-based business” and Home Office Expenses).
- Keeping a record each time a taxpayer works from home – The taxpayer would need to record each and every time the relevant work area (e.g., a home office) is used during the year for work or business purposes. Such a diary would be required where a taxpayer’s work hours at home are not regular or consistent throughout the income year (and, therefore, the taxpayer cannot establish a regular pattern of use).
- Maintaining a 4-week representative usage diary – The taxpayer can maintain a diary that shows how their home work area is used over a 4-week representative period, to work out a ‘pattern of use’ for the entire income year. However, such a diary can only be used if the taxpayer’s work from home hours are regular and constant throughout the year. In this case, a taxpayer would simply multiply their 4-week result over the remaining part of the income year, taking into account any periods of annual leave, sick leave, etc.
Note that the ATO would also expect that a separate 4-week representative diary is kept for each income year in which home office running expenses are being claimed.
The ATO has advised that a record number of taxpayers are claiming deductions for expenses incurred while working from home. As a result, the ATO will be paying closer attention to these claims in the 2019-2020 income year.
