Whether you work from home full-time or simply squeeze in a few overtime hours, there are plenty of home office costs you could be claiming. This article will take you through everything you need to know about claiming home office expenses in Australia. When you reach the end, you’ll have a clear plan of action for maximising your next tax return.
Your first and most important step is to ensure you are indeed eligible to claim work-from-home expenses. Thankfully, the ATO’s criteria are relatively straightforward. To be eligible to claim home office expenses, you must:
- Fulfil genuine employment duties while working at home (e.g. regularly completing projects at home would count, whereas checking emails once or twice would not);
- Incur operational expenses as a result of the work you do from home;
- Maintain clear records of these expenses.
If you work from home regularly, it helps to set up a dedicated area. Not only will this help you establish work/life boundaries, but it’ll prove incredibly beneficial in keeping precise records and ensuring you’re eligible for the tax deductions covered below.
What are home office expenses?
Home office tax deductions cover the cost of working from home and are split into two broad categories: running expenses and occupancy expenses. Understanding what each category covers is crucial, as it will help you decide what you can claim and which method you should use to net the biggest deductions.
Home office running expenses
This category covers all the costs that go into running your office. Common running expenses include:
- Heating and cooling
- Internet and phone
- Depreciating assets like office furniture, equipment, and even curtains, blinds, floor coverings, light fittings, and other fixtures;
- Cleaning and repair costs.
Note that for tax returns prior to the 2022-33 financial year, you are only eligible to claim running expenses if you had a dedicated workspace. If you shared your working space with other members of your household in a lounge room or kitchen, you cannot claim running costs on your tax return. From July 2022 onward, the Australian Tax Office revised the rules for home office expenses, giving Australians an avenue for claiming some work-from-home costs, even if they don’t have a dedicated home office. We cover these changes below in the section on the revised fixed rate method.
Home office occupancy expenses
Occupancy expenses relate to people who use their home as a place of business, such as a self-employed hairdresser working from a home-based salon or an art teacher offering classes in a dedicated studio in their house. If you are an employee who works from home, you need to justify to the ATO that you have a dedicated room that you use for work.
Home office occupancy expenses include:
- Mortgage interest
- House insurance
To claim any of these occupancy expenses, you need to determine the work-related proportion of each cost based on the floor size of your house. You also need to clearly identify the area of the house you use for work as a place of business. The following features can help you do this:
- A space not readily suitable or adaptable for domestic purposes;
- Using the area exclusively for operating your business and meeting clients or customers.
Pro Tax Tip: If you claim occupancy home office expenses, you might incur Capital Gains Tax should you sell your home.
The best way to claim home office tax deductions
When claiming tax deductions, you need to ensure each expense satisfies the following three criteria:
- It’s a personal expense – you incurred the expense, not your business;
- It’s a paid expense – by you and not your employer (if you were reimbursed, the expense doesn’t count);
- It’s a substantiated expense – you can back up your claim with proof.
Claiming home office expenses involves keeping receipts of your purchases and expenses. The best way to record your small expenses and log your home office working hours is to keep a diary. For depreciation purposes, you’ll need to include calculations of how much you used your equipment for work. You’ll also need to keep itemised phone accounts from which you can identify work-related calls and internet usage.
How do you claim home office expenses?
From the 2022-2023 financial year onward, there are two methods you can use to calculate home office expenses:
- Fixed-rate method (67 cents per business hour)
- Actual cost method
Note that for the 2019-2020, 2020–21, and 2021-2022 tax years, you also have a shortcut method available to you. However, if you’re still working on your tax returns from those financial years, we recommend that you contact a skilled local accountant who can help you iron everything out and minimise your risk of incurring penalties.
How to use the shortcut method
Due to Covid-19, the ATO introduced a temporary shortcut method allowing Australians to claim home office costs at a flat rate of 80 cents per business hour. This involves a holistic inclusion of running costs such as phone, internet, the decline in value of office equipment and furniture, and heating, cooling and power costs. If you use this method, you don’t need a dedicated work area, but the potential drawback is that you can’t claim any other running costs.
To be eligible, you need to have a diary showing your working hours for the entire period you wish to claim. This could be a timesheet, work roster, or personal record that sets out the hours you worked from home.
How to use the ATO’s revised fixed rate method
The ATO’s fixed rate method allows you to claim a flat rate per business hour to cover the costs of working from home. For the 2022-23 tax year, the rate increased from 52 cents to 67 per business hour. This revised fixed rate covers:
- Energy costs;
- Phone and internet;
- Computer consumables and stationery.
Note that you can’t claim any other deductions in these expense categories if you use this method. However, a major benefit of the revised fixed rate method is that you don’t have to have a dedicated office space to apply it.
The ATO states that you can claim the following home office costs separately:
- The cost of cleaning a dedicated home office;
- The decline in value of home office furniture and furnishings;
- The cost of repairs and cleaning of your home office equipment, furniture, and furnishings
You’ll need to keep a record of your actual hours spent working. In previous tax years, you could keep a four-week diary and average it out across the remained of the year. These old rules apply up to 28 February 20203. However, in March 2023, the ATO announced changes to the fixed rate method. According to the new rules, the ATO will no longer accept four-week diaries and estimates. Instead, from 1 March 2023 onward, you must keep timesheets, rosters, work logs, or a diary for the entire income year.
Be sure to keep receipts, phone records (showing your work-related calls), internet bills, and a work log for the full year. In your diary, you should also include any small expenses you don’t have a receipt for (as long as each one is $10 or less and the total is no more than $200). You must also record the work-related use percentage of depreciating assets you wish to claim.
How to use the actual cost method
The ATO’s actual cost method is more time-intensive to calculate. However, for some people, it delivers the result they want on their tax return. To use this method, you must determine all the actual expenses you’ve incurred for work. These costs may include:
- 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 (if you use a dedicated area for work);
- Computer consumables and stationery.
You’ll need to keep a record of your actual work hours in a diary for a representative four-week period. To claim depreciation of assets, you’ll need a receipt showing each item’s original cost. You’ll also need a calculation showing the percentage of the year you used the assets exclusively for work. If you’re unsure about these calculations, your accountant can handle them for you.
To work out cleaning, power, heating and cooling costs, you’ll need to establish a dedicated work area. Measure the floor area in proportion to the rest of the house to determine the percentage of costs you can claim. Alternatively, power costs can be worked out based on the wattage of appliances used, such as lights, computers and heaters. To do this, you simply multiply the power usage for each appliance by the number of hours used and apply the electricity bill charges based on cents per Kilowatt hour.
To calculate your claimable phone and internet costs, you’ll need itemised bills for at least one month. This will allow you to identify work calls and work-related internet usage.
To claim a deduction for the depreciation of an asset that cost $300 or more, calculate the decline in value for the period you:
- Owned the assets during the income year;
- Used the assets for work-related purposes.
What home office costs can you not claim?
There are plenty of items you cannot claim at all, and some of them might surprise you. As an employee working from home, you won’t be able to claim the costs of:
- Coffee, tea, milk, toilet paper or other household items (even if your employer would have supplied them in the workplace);
- Children’s education costs, such as online learning, iPad, computers, laptops, or desks;
- Certain occupancy expenses like rent, mortgage interest, water, and rates.
It pays to get help with your tax return
A registered ITP Tax Accountant can help you claim every deduction you’re entitled to and maximise your refund. ITP will take all the complex calculations off your hands, which is especially helpful with depreciating assets and some of the more challenging home office costs outlined above. Your local ITP Tax Accountant will ensure you’re making every valid claim possible to get your tax bill down and your refund up where you want it to be. We liaise with the ATO on your behalf, saving you the hassle, and our competitive fees are deductible on your next year’s tax return. What’s not to love?
ITP’s friendly accountants have been helping Australian individuals and businesses with their taxes for 50 years and counting. Call us on 1800 367 487 or book your appointment online today.