ATO publishes new guidance on claiming deductions while working from home due to COVID-19

By Stuart Dall - April 24, 2020

Many Australians are now working from home to ensure business continuity amidst the COVID-19 pandemic. As a result, the Australian Taxation Office (ATO) is expecting an unprecedented amount of home office related tax deductions this financial year. The ATO has provided new guidance on what can be claimed.

What does the new guidance allow?

The ATO has published a new “shortcut” method[1] for calculating the deduction available to an individual for additional running expenses incurred as a result of being required to work from home during COVID-19.  Under this shortcut method, an employee or business owner will be allowed to claim $0.80 for every hour that is worked at home.  

This hourly rate covers all additional running expenses, including electricity and gas (heating) expenses, depreciation[2] of and repairs to home office furniture and equipment (including computers or similar devices), computer consumables, telephone (depreciation, plan and call costs) and internet expenses and cleaning expenses.  An individual using this shortcut method cannot claim further deductions for additional running expenses.

An individual wishing to use the shortcut rate will need to keep a record of the hours they have worked at home.  This could be in the form of timesheets, rosters, a diary or similar document that sets out the hours worked.

Who can use this shortcut method?

The shortcut method can be used by any individual – employee or business owner – who is working or running their business from home and incurring additional running expenses as a result. An individual using this shortcut method will need to keep a record (in the form of timesheets, rosters, a diary or similar document) of the hours they have worked at home.  

When does the new shortcut method apply?

The shortcut method applies to the period from 1 March 2020 to the date the ATO guidance is withdrawn.

Are there other methods for calculating deductions?

There are other methods for calculating deductions apart from the “shortcut” method. The deductions available depend on whether home is the individual’s principal place of business and, where that is not the case, whether the individual has a room set aside primarily or exclusively for work activities.  Examples of when the home is also a place of business include a potter who has their workshop and kiln at home; a doctor or dentist who has their surgery or consulting room at home and a person who runs a small business from what was once their garage.

Where the home is a place of business, allowable deductions include the business proportion of occupancy costs (rent or interest on a mortgage, property insurance and rates and taxes) in addition to the business proportion of running costs.  Where the home is not a place of business, allowable deductions are limited to the work-related proportion of running costs.

How does an individual calculate deductions where home is not a place of business?

An individual in this situation could use the ATO’s new shortcut method described above, the ATO’s pre-existing fixed hourly rate method[3] or calculate the work-related proportion of actual expenses incurred. 

Fixed hourly rate

The current fixed rate is $0.52 per hour for every hour worked from home. This rate covers home electricity and gas (heating), cleaning and depreciation of home office furniture and furnishings. A diary of the hours worked from home is required to substantiate the deduction claimed.

Unlike the new shortcut method, the hourly rate of $0.52 per hour does not cover computer consumables, stationery, phone and internet expenses or depreciation of a computer or similar device. The work-related portion for those items needs to be separately calculated. 

Actual expenses

Where the individual has a dedicated work area, a proportion of the actual running expenses can be claimed.  

The allowable deduction for heating, cooling and lighting, involves two key steps:

  1. Work out the average cost of each unit of power used (set out in relevant utility bills).
  2. Determine the average units of power consumption per kilowatt-hour for each appliance, piece of equipment or light used. 

The amount obtained by multiplying the results of the two steps above gives the annual running cost for each appliance, equipment or light used.  The deduction available is then the annual running costs multiplied by the total annual hours worked at home.

For this method, a record of hours worked from home will need to be maintained as well as records to substantiate the amount claimed.

Does claiming working from home deductions impact the main residence exemption?

Entitlement to the capital gains tax (CGT) main residence exemption is not impacted where the home is not a place of business (that is, deductions are only available in relation to the business proportion of running expenses).  However, if the home is a place of business with a deduction claimed for the business proportion of occupancy expenses, entitlement to the main residence exemption will be impacted.  It is recommended that clients in that situation seek appropriate and specific taxation advice.

What are the next steps?

It is critical that you consider your position and how the rules apply to your current work-from-home set up. Contact your Pitcher Partners specialist now to review your situation and determine what action is required well before the end of this financial year on 30 June 2020.

[1]       Set out in Practical Compliance Guideline PCG 2020/3.

[2]       The tax technical term for depreciation is decline in value.

[3]       Set out in Practice Statement Law Administration PS LA 2001/6.

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