Aussies are being warned they need to start doing this one thing from next month, as a popular tax shortcut is being changed.
Australians who continue to work from home after this month are being warned to keep accurate records as a popular tax deduction shortcut is coming to an end.
The Australian Taxation Office’s shortcut method for calculating work from home expenses, introduced in 2020 during the pandemic, is ending on June 30, 2022.
“The 80 cent shortcut rate has been around for a couple of years now – it’s rarely the best method to calculate your working from home expenses in terms of the size of the deduction but it does have the great virtue of simplicity,” said H&R Block director of tax communications Mark Chapman.
“It rolls every working from home deduction – heating, cleaning, depreciation, mobile phone use – into one simple cents per hour rate.”
The ATO estimates that 4.8 million taxpayers claimed around $4 billion in working from home expenses in their 2020-21 return.
Of those, around one million are estimated to have used the shortcut method.
The shortcut method, which can still be used for this year’s tax return, allows taxpayers to claim 80 cents for each hour they worked from home.
It covers all expenses including phone, internet, the decline in value of equipment and furniture, electricity and gas, and only requires the taxpayer to keep a record of the hours they worked from home such as a time sheet, roster or diary.
“You can use this method if you worked from home and incurred some additional running expenses as a result, [and] have a record of the number of hours you worked from home,” the ATO says.
By contrast, the fixed rate method and actual cost method are more complicated and require more detailed records.
Fixed rate method
Using the fixed rate method, taxpayers can claim 52 cents for each hour they worked from home. That rate includes the decline in value of home office furniture such as a desk, electricity and gas, and cleaning.
“All you need to do to claim this is to keep a diary – note the time you start work each day, the time you finish work each day and any breaks,” said Mr Chapman.
“You can then claim 52 cents per hour for each working hour. In addition – and this is what makes this rate different to the temporary 80 cent rate – you can also make separate claims for the work-related proportion of items such as your home internet, mobile phone costs and other expenses that directly relate to your work such as stationery and printer ink.”
These additional deductions require detailed receipts or other written evidence.
To claim phone expenses, for example, the taxpayer must have phone accounts identifying work-related calls and private calls to work out the percentage over a typical four-week period.
And to claim internet expenses and asset depreciation, they must keep a diary showing their work-related internet use and the percentage of the year they use their depreciating assets exclusively for work.
“If you don’t have a representative four-week period of your hours worked from home or your work-related use of your phone, internet and depreciating assets because they vary throughout the income year, you will need to keep records for the entire income year,” the ATO says.
Actual cost method
The actual cost method, as the name suggests, allows the taxpayer to claim a deduction for the actual expenses they incur as a result of working from home.
Deductions for asset depreciation, cleaning expenses, electricity and gas, phone and internet and computer consumables are calculated individually, and require detailed evidence including receipts and diaries used to calculate the work-related percentage of each.
“With the actual cost method, you’ll need to keep a diary of your work from home hours for a typical four-week period and you’ll also need to work out the amount of your home, by floor area, that you’re using as your work space,” Mr Chapman said.
“From this, you can then work out the work-related proportion of your household expenses and apply this percentage to the actual amount you spend on electricity, gas, water, phone and internet. You’ll also need to keep all the original bills to prove your claim.”
For example, to claim cleaning expenses for an area set up as a home office, the taxpayer must add together their receipts and multiply the total by the floor area of the dedicated work area, divided by the whole floor area of the house.
They then reduce that amount by the percentage of private use by the taxpayer and the use of the home office by other household members.
The ATO notes that people can’t claim for additional running expenses if other members of the household who are not working from home are in the same room.
For example, “Lee works from her lounge room while her partner and three children watch television. Lee isn’t incurring any additional costs for lighting, heating or cooling as a result of working in that room, so she can’t claim a deduction for them.”
What to do from July
Mr Chapman said it was vital to start keeping records from the start of the financial year.
“Taxpayers need to be aware now that they will need to keep records to substantiate expenses such as home internet, mobile phone costs and depreciation of home technology,” he said.
“In addition, they will need to justify their work [slash] personal use split. Don’t leave it until later in the tax year to keep these, you need to keep proper records from July 1.”
Some experts have warned that the demise of the shortcut method will greatly increase the administrative challenge for taxpayers in the coming year.
“Working out the extent to which telephone and data plans are used for a taxable purpose can be very difficult, as most people do not receive itemised bills these days, and there are significantly greater volumes of downloads in homes these days for personal use such as streaming TV shows and movies,” the Tax Institute’s senior advocate, Robyn Jacobson, told the Australian Financial Review.
“The fixed rate method also requires the taxpayer to have a dedicated work area that they use when they work from home.”
She added that the rate of 52 cents may no longer be appropriate in light of rising costs for power and gas.
“We are looking to modernise the working from home methods for the 2022-23 financial year and we will consult as we always do and expect to be able to provide information about this later in the calendar year,” ATO Assistant Commissioner Tim Loh said in a statement.
“It’s important for taxpayers to keep good records so when it comes to the 2022-23 financial year they have a choice as to the working from home method that is most appropriate to their circumstances including records of all hours worked at home, receipts for all depreciating assets and equipment used when working at home, [and] records of the personal and work-related use of assets and working from home expenses.”