The outbreak of COVID-19 has forced many businesses to adapt their practice, and one of the most popular changes has included having employees work from home. While there are benefits to this transition – saving money on transport, added comfort, more time in the day to complete work – there have also been drawbacks.
One of the biggest issues working from home introduces is the newfound strain on home-based expenses. For one, you’re consuming a lot more electricity than usual. On top of that, you may have had to buy new equipment to set up a home office, and of course, all the while, your new valuables (and office space) are depreciating while you continue working from home. That’s why many who previously worked using this system took advantage of tax deductibles that were relevant to their situation. However, many newfound home-workers don’t know about these benefits and continue to bear the expense of their new system of employment.
That’s why today, Shoebox Books breaks it down for you.
We’re here to explain the benefits you can claim from working at home, whether this is your usual set-up, or whether COVID has forced this new experience onto you.
Working from home tax tips for employees!
There are a number of tax deductions that apply for essentially three main types of ‘working from home’ situations. These can be claimed for the upcoming tax year 2019/20 (July 2019 - June 2020).
- Working from home where you have another principal place of business (company office) before March 1 2020
- Running your business from your home as the principal place of business
- Working from home where you have another principal place of business after March 1 2020 due to the impact of COVID-19
For these three various situations, we break down some tax deductions you should consider claiming when lodging your 2019/20 return.
Working from Home as of March 1 2020
Due to COVID 19 forcing many people to work from home as a new method of work, there are a different set of guidelines for tracking new or added expenses incurred during this time to claim during your tax return. The temporary simplified method of calculating additional running expenses is applicable from 1 March 2020. This ‘shortcut’ method allows those new to calculating deductions to use a simple method: claim the cost of new expenses at 80c per hour worked from home.
Expenses that can be claimed:
- Electricity expenses associated with heating, cooling and lighting the area from which you are working and running items you are using for work
- Cleaning costs for a dedicated work area
- Phone and internet expenses
- Computer consumables (for example, printer paper and ink) and stationery
- Home office equipment, including computers, printers, phones, furniture and furnishings – you can claim either the
- Full cost of items up to $300
- Decline in value for items over $300
Outlined by the ATO
as of 15 Apr 2020.
The ATO website proves a great resource for explaining in detail this new calculation method for COVID-19 affected individuals that have been forced to work from home. However, to make your life even simpler, we’ve outlined some of the basic details of this new method below.
Firstly, here are the three ways people can calculate their running expenses.
- Claiming a rate of 80 cents per work hour for all additional running expenses. This can only be used for those new to working from home, as of March 1.
- Claiming a rate of 52 cents per work hour for heating, cooling, lighting, cleaning and the decline in value of office furniture, plus calculate the work-related portion of your phone and internet expenses, computer consumables, stationery and the decline in value of a computer, laptop or similar device. This is the standard fixed term calculation and can be used by anyone working from home before or after March 1.
- Claiming the actual work-related portion of all your running expenses, which you need to calculate on a reasonable basis. This is the standard measure for actual expenses and can be used for those working from home before or after March 1.
Evidently, the first option provides the best return on costs for running a home office, primarily for those who have transitioned to working from home during COVID, and is the easiest to calculate. Therefore, this is the best option for those new to working from home and looking to get a return on their expenses. So, how is this measure used to calculate added costs?
Say you’re new to working from home and have had to purchase new equipment – a laptop, desk, chair and stationery. On top of this, you’ve incurred higher electricity, phone and internet costs. All of these expenses can be claimed back at a rate of 80c per hour worked from home. All you need to do, in this situation, is keep a timesheet for documentation purposes. Of course, the standard rules for work expenses apply.
- You must have spent the money yourself (it hasn’t been reimbursed by your employer).
- The claim should be directly related to how you earn income.
- You must have records to substantiate your claim – receipts, timesheets, bills, etc.
Now, while this is the easiest method and works out better than the standard rate, you will get a better return using the actual expense method discussed below.
Working From Home Prior to March 1 2020
For those that have previously worked from home, or continue to work from home throughout COVID-19, expenses must be calculated using the existing rate or methods. These methods include a fixed rate or actual expense calculation.
The fixed rate is calculated at 52c per hour worked. This method is used in place of calculating the actual cost of expenses, such as heating, cooling, lighting, cleaning and the decline in value of furniture. This rate has been based on the average energy costs and the value of common furniture items used in home business areas. Again, it’s imperative that you keep a timesheet for documentation purposes. Alternatively, the ATO gives you the option of keeping a four week diary that is representative of your working hours to calculate the yearly cost of your home operations.
The actual cost method involves you calculating the decline in the value of depreciating assets. For this type of calculation, you must keep your receipts showing the amount you spent on the assets, and you must work out the percentage of the year you used those depreciating assets exclusively for work. In other words, you claim a deduction for the proportion of the decline in value that is related to your working hours. For this method, your calculations must be reasonable as you may have to demonstrate how you’ve reached your value. This method can also be applied to energy, gas, and internet expenses. Again, you must only deduct the amount that is appropriated towards your work.
Deductions you can claim while working from home:
(Table has been sourced from the ATO
Quick Tips for Working From Home
Allocate a Working Space
Establishing an office space maximises the expenses you can claim during tax time, especially if your home becomes your principal place of business (but not a part of your business).
Keep your receipts!
The taxation office requires all evidence of your expenditure, big and small. All direct expenses that you incur related to your home office (for work purposes only) can be claimed as a deduction, but you must be able to prove that you have used your own money to cover these expenses. An easy way to keep track of deductions you wish to claim is by using the ATO’s myDeductions
app, or if you have a more complicated business account to oversee, hiring a bookkeeper
is also beneficial.
Running Your Business From Home
Running a home business is seen as partly different to working from home, and therefore contains some different tax rules. A home business can include some of the following examples. For the most part, running a business from home will incur the same expenses as working from home and therefore those business owners will be able to claim their running expenses using the same rates as above. However, there is one different tax system to navigate for home businesses: capital gains tax (CGT).
Running a business from home can look like…
- A tradespersons who has made part of their home their workshop
- A small business that operates their main office from home
- A professional that has their consultancy or clinic at home
Deductions are similar to that of ‘working from home’
- Utility costs of the area which is used such as electricity and gas. This cost must be apportioned between business and personal use.
- Phone costs. Again, this must be apportioned between business and personal use. Installation costs cannot be claimed.
- Depreciation of plants and equipment. Office equipment such as desks, computers and chairs, for example, can be claimed. If the equipment is used for private reasons also, it must be apportioned.
- Depreciation of office fittings such as carpet and curtains can be claimed.
- Occupancy expenses such as rent, mortgage, insurance and rates can be claimed at the portion related to the room or workshop usage. This is usually calculated by the floor area. This is the largest variant from ‘working from home’ deductions.
Capital Gains Tax
As running a business from home deems it the main place of residence as well as the main place of business, according to the ATO, "you don't get the full main residence exemption… although you're probably entitled to a partial exemption.”
To calculate the capital gain that is not exempt (the area you are using as your business) you should determine the following:
- The proportion of the floor area of your home that is set aside to produce income;
- The period you use it for this purpose;
- Whether you’re eligible for the ‘absence’ rule;
- And, whether it was first used to produce income after 20 August 1996.
If you first used your home as your place of business after August 20, 1996, the market value of your home at the time you first used it to produce income is used to calculate your partial exemption from CGT. Prior to August 20 1996, the period before you first used your home to produce income is taken into account.
Navigating Tax While Working From Home
Due to the complexity COVID-19 has brought to calculating work expenses, and in turn, taxation, individuals with complicated working situations and who are unsure may want to consider getting the help of a tax adviser (fees to whom are also tax deductible!) particularly if they are using the actual expense method and calculating the depreciation of home office equipment. This method by far gets you the most return, but of course, is a bit more complicated to work out. Getting a bookkeeper or tax accountant to help means working out the best way to keep track of the expenses as you continue to work from home.
When it comes to deductibles and tax, Shoebox Books has you covered. Get in touch with your closest bookkeeper
today and learn about how you can maximise your income during COVID. Check out our latest blog posts
to stay informed about government initiatives and money management tips during this pandemic.