With the commencement of the 2023 financial year, the way in which employees may claim a tax deduction for their home office costs have changed. The 'shortcut method' allowed taxpayers in certain circumstances to claim a deduction for specified working from home costs based on an hourly rate of 80 cents per hour. This provision was widely used by taxpayers as a simple method of claiming tax deductions while working from home during periods of lockdown and company workplace policy. Effective from 1 July 2022, the 'shortcut method' is no longer available.
From the 2023 financial year onwards, there are only two ways to claim deductions for ‘working from home’ expenses: the 'fixed rate method' or the 'actual cost method'. As a result, substantiation requirements for home office deductions have changed, and from 1 July 2022, taxpayers may need to be more stringent in keeping written records to support their claim.
This article can be read in conjunction with our previous publication: Working from home? Tax deductions explained.
Fixed Rate Method
The 52 cents per hour fixed rate method may be used if an individual incurs additional running expenses due to working from home, and if they have a dedicated work area (e.g. home office). Furthermore, they need to maintain records of the work-related proportion of expenses for which they are not using the fixed rate method.
This rate accounts for additional running expenses such as decline in value of home office furniture and furnishings, cleaning, electricity and gas. Detailed records and substantiation of these expenses are not required. However, the rate does not include phone and internet expenses, stationery, or decline in value of other non-furniture depreciating assets (e.g. computers). These expenses can be claimed separately but only to the extent they relate to work, and if they are incurred because the individual is working from home.
To utilise the fixed rate method, a taxpayer will need to maintain:
-
A record of the number of actual hours worked from home from 1 July 2022 to 30 June 2023, or a diary showing the usual pattern of working from home which covers a representative four-week period;
-
Written evidence such as receipts showing the amount spent on expenses and depreciating assets;
-
A diary showing the work-related use of internet and the percentage of the year the individual utilises their depreciating assets exclusively for work;
-
Phone accounts which identify their work-related phone calls and private phone calls, to calculate the percentage of work-related use over a four-week representative period.
Of note, if an individual records the hours they work from home during a four-week representative period, they can extrapolate this percentage across the remaining income year to calculate the total number of hours worked from home. If the work pattern changes, they would need to create a new record.
An individual may not have a representative four-week period for hours worked from home or the work-related use of their phone, internet and depreciating assets because hours worked or work-related use varies throughout the year. In this case, they will need to keep records for the entire income year.
Actual Cost Method
Under the actual cost method, individuals can claim a deduction for working from home expenses which arise as a result of working from home. Generally, individuals such as employees can only utilise this method if they incur additional running expenses as a result of working from home. To claim a tax deduction for actual costs, individuals need to maintain:
Furthermore, the ability to claim a considerable amount of expenses depends on whether the individual has kept appropriate records. For example:
-
For phone and internet, individuals need to work out their work-related use over a four-week representative period.
-
For other costs such as heating, cooling and lighting, individuals would need to work out the cost based on the total annual hours used for work related purpose based on your diary and other factors.
In addition, an individual needs to keep all receipts, bills and other documents which substantiate the additional running expenses they incurred while working from home, and how the work use was determined.
As a result of these substantiation requirements, we recommend individuals and employees start maintaining records of their expenditure and document their hours spent working from home. We also remind readers that in order to claim a tax deduction for expenditure, it must directly relate to earning assessable income.
More information
If you would like to find out more, or need any assistance in relation to claiming working from home deductions, please contact your local Moore Australia advisor.