Photo by Allie on Unsplash
Photo by Allie on Unsplash
With an onslaught of extra people working from home thanks to COVID-19, tax-time in 2020 could look a little different from previous years.
On this page:
- How tax deductions work
- The shortcut method
- The fixed-rate method
- The actual cost method
- Asking your employer for a reimbursement
- Which method to use
- What to avoid this tax season
Data from the Australian Bureau of Statistics shows 46% of the workforce is working from home at the moment, as many workplaces shut their offices to curb the spread of the coronavirus. A May survey from NBN Co found 81% say the experience of working from home has positively changed the way they think about managing work/life flexibility, and 67% expect to work from home more frequently once the crisis is over.
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The unfortunate side effect of working from home is it can be more expensive for you, as expenses that would normally be paid for by your company - like office chairs, internet, electricity and computers - now have to be paid for by you. This can have a negative effect on your finances, especially at a time when your savings may be worse off thanks to this pesky virus.
But the silver lining is that you can claim many expenses incurred by working from home as a tax deduction, reducing your taxable income. And with so many more people working from home this year, there’s expected to be a surge in work-related deductions. To address this, the Australian Taxation Office (ATO) has introduced new rules that make claiming tax deductions easier.
With tax season coming up on 1 July, here’s everything you need to know about working from home tax deductions in 2020.
All tax information and advice on this page is general, not personal. Seek the help of a qualified accountant or tax adviser for personal tax advice, or consult the ATO’s website.
What is a tax deduction, and how do they work?
In case you weren’t aware, a tax deduction is a deduction that lowers a person's tax liability by reducing their taxable income. It isn’t just money you get back - a $100 deduction doesn’t mean you pay $100 less tax. Instead, a $100 tax deduction means you reduce your taxable income by $100. If your marginal tax rate is 32.5%, then a $100 deduction would result in a tax saving of $32.5, meaning you’d be paying for 67.5% of the item.
Deductions can be a range of things, but they mostly need to be related to earning an income. So general expenses like a car, toys for your kids or a wedding are not deductible. According to the ATO, things that are generally tax-deductible include:
- Work-related expenses (tools, equipment and other assets, self-training expenses etc.)
- Investment costs - here is a handy guide on investment property expenses you can claim as an example
- Gifts and donations
- Personal super contributions
- The cost of managing tax affairs
- Interest charged by the ATO
That first point is what we’ll be focusing on in this article. If, for example, you purchased a new laptop to work from home, then you’d be able to claim this as a tax deduction. Likewise, if you have an increased electricity bill, you can claim this as a work-related expense too.
According to the ATO, there are three different ways you claim work-related expenses, one of which is new:
- The shortcut method (new)
- The fixed-rate method
- The actual cost method
The shortcut method
In early April, the ATO introduced the shortcut method to help people make work from home expense claims. Using this method, people will now be able to claim a rate of 80 cents per hour for all their running expenses, rather than needing to calculate costs for specific running expenses. Multiple people in the same household can claim this flat rate, and unlike other methods, you don’t need to have dedicated WFH area - this rule has been put in place to accommodate for people having to make last-minute arrangements.
💻🏠 #WorkingFromHome to reduce the risk of #coronavirus? We're here to help. From 1 March to 30 June 2020, we're simplifying home office deduction rules so you can claim up to 80 cents per hour you work from home - learn more @ https://t.co/Ek9iq0jo0R pic.twitter.com/YJPSk0v4Da— ato.gov.au (@ato_gov_au) April 7, 2020
According to the ATO, this applies for the period from March 1 to June 30, and includes all hours worked in this time. So say, for example, that you worked 8.30 am to 5 pm five days a week from March 1 to June 30, that’s 8.5 hours per day of work, factoring in one hour of lunch. The three months and 29 days in that period equates to 82 working days, which is 697 hours. Based on the 80 cents per hour rule, that would be a flat deduction of $557.6, which would result in you reducing your tax bill by $181 on a 32.5% tax bracket.
Claims cannot be made using this method prior to March 1 2020, and the scheme is set to be reviewed after June 30 as the ATO decides whether to keep it or not.
Assistant Commissioner Karen Foat said the new shortcut method will make it easier for those who are adjusting to working from home for the first time.
“The shortcut method provides a rate of 80 cents per hour and will only require you to keep a record of the number of hours worked from home,” Ms Foat said when it was announced.
“This recognises that many taxpayers are working from home for the first time and makes claiming a deduction much easier.
“If you choose to use this shortcut method, all you need to do is keep a record of the hours you worked from home as evidence of your claim.”
Women With Cents Founder Natasha Janssens said this method could be better for those who don’t normally work from home.
“If you don’t normally work from home (or do work-related study), if you don’t have a designated workspace such as a study or office but instead work at the dining table, if there are others at home using the internet at the same time as you are working, if you use a work provided laptop – then it is likely that the shortcut method will give you a better deduction,” Ms Janssens told Savings.com.au.
“If on the other hand, you are eligible to claim depreciation expenses on your laptop and mobile phone, if you have a dedicated office that you work from, if you are able to easily calculate the work-related portion of your phone and internet bill - then using the actual method or fixed rate methods will likely give you a larger deduction.
“At the end of the day, it is important to fully explore all three options and do the maths.”
This method is definitely the simplest of the three, as it covers all work-related expenses, but if you choose to use it, you can’t use either of the other two below.
The fixed-rate method
The fixed-rate method was the go-to ‘per-hour worked’ method before COVID-19, and may generate a bigger tax deduction, if you’re willing to put a bit more work in.
According to the ATO, this method allows you to claim a deduction of 52 cents for each hour you work from home for the work-related expenses you incur for additional running expenses. This fixed-rate covers expenses incurred for:
- The decline in value of home office furniture and fittings
- Electricity and gas for lighting, heating and cooling
- The cost of repairs for work-related equipment
To use this method, you’ll need to keep a record of all hours worked for at least a four-week period, to show your usual working from home pattern. This can then be extrapolated across the remainder of the year, but you’ll need a dedicated work area, like your room or a home office, for this to be available. You will also need to separately calculate phone, internet and extra costs like stationery, which makes it less convenient than the shortcut method, as you need to keep records of how much you use such things.
There’s one exception to this: The ATO allows a fixed amount of $50 for things like phone and internet bills as a deduction for those who don’t have sufficient records.
Davie Mach, Chartered Accountant and Director of Box Advisory Services, agrees with the sentiment that this method could result in a bigger tax deduction.
“Despite the ATO announcing a "shortcut" method of 80 cents for each hour you work from home being claimed on WFH expenses, this may not be the best option,” he told Savings.com.au.
“Your accountant can help you work out your individual expenses such as phone costs, internet costs, stationery, decline in value and repair of capital items and many more.
“By individually assessing how much you can claim, you can potentially claim more through this method instead.”
If you can’t use this method yourself, ask an accountant for help, or use the ATO’s home office expenses calculator.
The actual cost method
The final method the ATO allows is the actual cost method, which can result in an even bigger deduction but requires more record-keeping on your part. This method allows you to claim the additional running costs you directly incur as a result of working from home like:
- electricity and gas for cooling, heating and lighting
- the decline in value of home office furniture (desk, chair) and furnishings,
- the decline in value of phones, computers, laptops or similar devices
- phone expenses
- internet expenses
- Cleaning costs
The records you need are more exhaustive. To calculate the decline in value (depreciation) of assets, for example, you need to keep receipts showing the amount spent, then show the percentage of the year you used that asset just for work, and claim the portion of the decline in value that reflects your work-related use.
To work our the cost of utilities you can deduct, you need the cost per unit of power used from your power bill, the total annual hours used for work-purposes, and the average units used per hour, to work out exactly how much energy you used while working.
If that all sounds like nonsense, then you should again check with an accountant, as the record-keeping required might be beyond the average person. You can also use the ATO’s myDeductions tool.
Don’t forget purchasing costs
As a part of the actual cost method, you can claim the cost of purchases for assets up to $300, based on the portion of time it is used for work. For purchases that cost more than $300, you can only claim depreciation costs.
The ATO uses an example where someone purchases an office chair to park themselves in while they work from home. The chair cost $249 - less than $300 - and it is estimated that 90% of its use is for work purposes.
In this instance, 90% of that $249 cost can be claimed as a tax deduction, which means purchasing this chair for your home office would result in a tax deduction of just over $224. More examples of deducting purchasing costs using the actual cost method can be found on the ATO’s website.
Try asking your employer for a reimbursement
While deducting such expenses from your tax return can be beneficial, it can be more beneficial to ask your employer for a full reimbursement for certain things. If they’ll allow it then you could get the whole cost back, instead of just a percentage based on your tax bracket.
Licensed financial adviser and author of On Your Own Two Feet Helen Baker says many employees may have a right to have certain expenses reimbursed by their employer.
“For employees, expense reimbursement is always a better option than a tax deduction, as the employer is likely to pay the full cost of a particular expense, that is, you get 100 per cent back. A tax deduction, on the other hand, doesn’t mean the employee will get the full expense back,” Ms Baker said.
“For instance, if you are in the 32.5% tax rate bracket, you will still be paying 67.5% for the cost of the item.
“Some employers will be very lenient. Others might want to retain ownership of some items they reimburse you for, such as PCs or other high-cost hardware. Check with your employer before deciding whether you would like the item reimbursed.”
So which method should you use for what?
Ms Baker has outlined which method might be best for claiming certain items this tax season.
“If your role is client-facing and requires lots of phone use to enable you to do your job, it may be reasonable for you to request that your employer covers this expense,” Ms Baker said.
“This could be by way of a flat ‘disbursement’ fee of, say, $50-100 a month, which is easy for both you and your employer.”
If you choose to claim these calls as a tax deduction, then Ms Baker said the actual cost method might be appropriate.
“You must also keep a record of itemised work call costs. For those only using their phone for work occasionally, the shortcut or fixed-rate method for claiming a tax deduction may be more appropriate for you.”
Internet and mobile data
“You could ask your employer to reimburse you for these costs if you can show that you had to go on a higher-cost plan to enable you to work from home effectively,” Ms Baker said.
“It may be reasonable for the company to pay the difference between the two plans. If you have not upgraded your plans, you can still claim a portion of your internet and mobile data costs as a part of the shortcut, fixed-rate or actual cost method.”
Hardware (laptops, stationery, mouse etc.)
“If you were required to purchase essential hardware to carry out your job at home – and those items will not be for personal long-term use – ask your employer if they will reimburse you for the expense,” she said.
“Your employer is unlikely to reimburse you for items they deem non-essential or for personal use which may or may not include a second PC monitor, cables for your home printer, printer ink if other family members are also using the printer, or a laptop that you will keep at home.
“Speak to your accountant about the best way to make this tax deduction.”
Remember that you claim the value of items purchased up to $300 as discussed above.
If you needed to get a subscription for software solely for the purpose of work (for example, Microsoft Office, Adobe Creative Cloud etc.), you can again ask for a reimbursement.
“However, if you already had the program installed on your home computer and the license expired, you may only be able to claim a portion of the expense as a tax deduction, as you are likely to continue using the software for personal use.”
Ms Baker says your employer is unlikely to reimburse you for furniture costs (such as an office chair or desk), as you'll likely continue to use the furniture for non-work purposes.
“Your alternative is to claim as a tax deduction. If you are claiming under the shortcut method, this expense falls under the 80 cents per hour calculation,” she said.
“However, if you are using the actual cost method and the assets cost less than $300, you can get an immediate deduction for the depreciating asset. While cleaning products are also essential in a home office these are included in the shortcut and fixed-rate methods.”
“Heating, cooling and lighting is covered under the shortcut method and fixed-rate method for tax deductions,” Ms Baker said.
“Your employer is unlikely to agree to a reimbursement, as it is difficult to determine what proportion of your bills was incurred for work use, particularly if there are multiple people in your household.”
What to avoid this tax season
With so much emphasis on claiming work from home deductions this tax season, don’t forget that the ATO can still ping you for making incorrect or even fraudulent deductions. The ATO itself has said it’ll be paying close attention to people’s deductions this year.
“The ATO is also reminding people that the three golden rules for deductions still apply. Taxpayers must have spent the money themselves and not have been reimbursed, the claim must be directly related to earning income, and there must be a record to substantiate the claim,” it said when announcing the shortcut method.
The biggest thing you should avoid is not claiming anything. You could be saving yourself hundreds of dollars by keeping some simple records of the hours you’ve worked, and the cost of certain work-related items and how much you’ve used them.
Dr Adrian Raftery, author of 101 Ways to Save Money on Your Tax - Legally!, said every dollar saved counts during COVID-19, and that keeping receipts is important.
“With the need to get back as much as you can whilst things are financially tough during COVID-19 , not to mention the ATO continuing ramping up audit activity yet again it is important to keep your receipts,” he said.
“The ATO motto is no receipt = no deduction so you could be costing yourself $$$ by not keeping those dockets! The ATO have a great app called MyDeductions which is an easy way to keep your receipts for year-end.”
While keeping receipts is important, there are also some things you shouldn’t make any claims for.
Don’t claim for food
While your employer might have provided snacks as well as coffee and tea in the office, they're unlikely to this for you if you're working from home, assuming you can feed yourself. Therefore, personal food and drink expenses are unable to be claimed.
“Your employer-provided coffee, tea and milk in the office, and might have covered your takeaway dinners if you had to work late, out of goodwill. While you are working from home, however, your employer is very unlikely to cover this expense, nor can you claim these general household items as a tax deduction,” Ms Baker said.
“This is because you are presumably at home and are able to cook your meal.”
Don’t claim for parking costs
Ms Baker also says your employer may not cover travel and parking costs.
“Travel to and from the office is not tax-deductible, so seek advice from an accountant regarding your home being the new office,” she said.
“If you had to regularly get the mail for your employer, or pick up work parcels, these costs may be tax deductible for the public transport ticket and the kilometres travelled by car, depending on the journey.”
Don’t claim for Friday drinks
Lastly, at-home alcohol and snacks for Friday Zoom drinks are non-claimable.
“Your employer might have purchased wine and snacks for office socials, but this was out of goodwill, as alcohol is not a tax-deductible purchase,” Ms Baker said.
“As these items are more of a luxury, rather than a necessity for doing your job, your employer may reimburse you for these items but the ATO won’t allow you to make a tax deduction for them. “
Savings.com.au’s two cents
COVID-19 hasn’t been much fun for anyone, but if you’ve started working from home because of it, then it represents a unique opportunity to get a little somethin somethin back, especially if you’ve had to shell out your own money for work stuff. And even if you worked from home already, it’s still worth knowing what you can claim and how much you could get back.
If the rigamarole of working out what you can claim and how much you can claim for, then it’d be worth your time asking a qualified accountant to help you with it all.
“Avoid paying too much in tax or leaving yourself to a visit from the taxman. Great accountants are like surveyors ... they know where the boundaries are,” Mr Raftery said.
“You can generally delay the lodgment of your return to May next year and their fees are tax-deductible.”
Savings.com.au does not provide tax advice. This material has been prepared by Savings.com.au and is for informational purposes only, and is not intended to provide, and should not be relied on for tax advice.
For tax advice relevant to you, visit the ATO or consult an independent tax advisor.
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