Home office tax deductions for remote employees [EXPLAINED]

We’re a fully distributed business at SBO.Financial

Our entire team works remotely, whether that be from a coworking space, cafe or most commonly, the home office.

As an employer of accountants, an often enthralling discussion is the subject of claiming home office expenses in tax returns.

What do you claim? What’s your methodology? What about Capital Gains tax?

To put these questions to bed, we put together a memo for our staff to save them from navigating the confusing ATO website and asking for advice at the Sunday BBQ. 

A number of people have found this helpful so we decided to share it publicly.

But first, a quick disclaimer.

It goes without saying that you should seek advice from a registered tax accountant before attempting to do this yourself. Use this memo as a guide only.

Now that the ass-covering is complete, let’s begin.

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Overview

1. A taxpayer who carries on their employment activities at home may be entitled to deductions for part of the expenses incurred in relation to the use of the home. 
2. There are 3 methods you are able to use to calculate home-office deductions. Use this Googlesheet if you want to skip the rest of this blog and calculate which method is best for your circumstances.

Detailed Analysis

Overall, there are three categories of expenses to consider when calculating the maximum deductions that can be claimed by an individual taxpayer who performs employment duties from home. These are as follows:

1.     Running expenses;

2.     Occupancy expenses; and

3.     Phone and internet expenses.

These categories of expenses are explained below.

1.     Income tax deductions available for running expenses incurred

The work-related proportion of the following running expenses are able to be claimed:

• Electricity / gas associated with lighting, heating, cooling the home office as well as operating any depreciating assets;
• Cleaning expenses;
• The decline in value of equipment, furniture and fixtures in the area used for work;
• The cost of repairs for the equipment, furniture and fixtures in the area used for work; and
• Other running expenses, such as printer running costs, stationery, etc. 

1.1.   Calculation of running expenses using the “fixed rate” method

 The fixed rate method is one of two methods that can be used to calculate the running expenses of the area used for work. The method is as follows:

• The taxpayer can use a fixed rate of 52 cents per hour for each hour that they work from home. This rate encompasses all the possible deductions outlined in Section 1, above.
• The taxpayer should maintain a diary for a minimum of four weeks in a financial year, outlining the hours spent working from the home office. The hours calculated during this four-week period are able to be extrapolated for the remainder of the year.

 1.2.   Calculation of running expenses using the “actual expenses” method

 The steps for using the actual method to determine the running expenses differs depending on whether a dedicated work area is maintained or not. In otherwords, whether you have a dedicated home office, or you're the type that just floats around the house with your laptop.

 1.2.1. Dedicated work area is maintained for performing employment duties

• Calculate the total expenses incurred for electricity / gas and cleaning;
• Calculate the floor area of the dedicated work area as a percentage of the total floor area of the home;
• Calculate the percentage of the year that part of the home was used exclusively for work, taking care to adjust for any private usage of the dedicated work area; and 
• Multiply the total expenses incurred for electricity / gas and cleaning by the floor area percentage and the percentage of the year it was used exclusively for work purposes; and 
• Calculate the decline in value of equipment, furniture and fixtures in the area used for work and multiply this amount by the work-related use.

 The sum of the above is the total deductible running expenses that the taxpayer can claim where a dedicated work area is maintained.

 1.2.2. Dedicated work area is not maintained for performing employment duties

• Where a dedicated work area is not maintained, the taxpayer must determine the cost per hour of electricity / gas for running lights, heating and cooling in the areas where work is performed.
• This cost per hour is then multiplied by the number of hours spent working at home.
• However, where work is performed in shared spaces, such as a living room or dining room where other family members are present, only the costs associated with operating a laptop or specific equipment for work purposes is able to be claimed.
• The taxpayer is also able to calculate the decline in value of equipment specifically used for work purposes, apportioned for the time spent using it to perform work related duties.

 Please refer to this Google Sheet to calculate the relevant running expenses under each method to determine which method results in the most beneficial outcome. 

 2.     Income tax deductions available for occupancy expenses incurred

 An employee of a business is unable to claim deductions for proportions of occupancy expenses incurred, such as rent, mortgage interest, property insurance, land taxes and rates.

 3.     Income tax deductions available for phone and internet expenses incurred

 There are two methods that can be used when calculating the deductions available for phone and internet expenses. These are discussed below.

 3.1.   Calculation of phone and internet expenses using the limited documentation method

 Using the limited documentation method, a claim up to a maximum of $50 can be made using the following rates:

• $0.25 for work calls made from a landline phone;
• $0.75 for work calls made from a mobile phone; and
• $0.10 for text messages sent from a mobile phone.

3.2.   Calculation of phone and internet expenses using the actual expenses method

 Where the costs for phone and internet costs is likely to exceed $50, the actual expenses method should be used in order to calculate the total deduction available. The steps to apply this method are as follows:

•  Calculate the percentage of work use of the phone and internet over a four-week period using a reasonable basis. A reasonable basis could include the following:

o   The number of work calls made as a percentage of total calls;

 o   The amount of time spent on work calls as a percentage of total calls; and

 o   The amount of data downloaded for work purposes as a percentage of your total downloads.

• Apply this percentage to phone and internet bills received to calculate the deductible work-related portion.

 4.     Capital gains tax consequences associated with an employee working from home

 When an employee that has been claiming working from home deductions in their individual tax return sells their home, no capital gains tax consequences will arise. This is on the basis that the business has not been operated in the taxpayer’s personal name, and has been operated through a company or trust. It is the company or trust that has used the home to run a business, not the individual taxpayer.

 Importantly, should the taxpayer charge the entity carrying on the business rent for using the home, capital gains tax may be payable on the sale of the property as a result of the derivation of income. As this scenario has not been considered in this memorandum, the capital gains tax consequences have also not been considered in detail.

So, in summary:

 Use this spreadsheet we’ve prepared for you to calculate the most optimal outcome for you.