Your Guide to Home Office Tax Deductions (Part 2)

Now we have covered what a home office and home-based business is, it is time to move on to home office tax deductions. So, what can you claim (and what can’t you claim)? Continue reading to find out more.

Make sure you have read Part 1 before reading this part, as it likely won’t make a lot of sense if you haven’t! Part 1 can be found here. If you have any questions, give Bottom Line Control a call on (07) 5471 7077 and we would be happy to help.

*Please note, this guide is broad in nature and may not suit your exact circumstances. Always speak to a professional when it comes to individual and business taxation matters before making any decisions.

A quick home office tax deduction recap

As a quick reminder, the following are some of the main points that came out of Part 1:

If you work from home, you may be able to claim deductions for some of your expenses relating to the area you use for income-producing activities.
You can either work at home or from home - at home means you complete most of your work from home (e.g. a dressmaker) whereas from home means you complete most of your work at other properties and store tools and records etc at your home (e.g. gardener).
In general, the deductions you can claim depend on whether you have a designated work area and/or your home is your principal place of business.
If your home is the principal place of business, your business is run from home and a room/area is set aside exclusively for business activities.
If you have a work area set aside primarily or exclusively for work but your home isn't your principal place of business e.g. you have an office that you work from but complete work activities after hours.
If you don't have a work area, your principal place of business is not at home and you do not have an area or room primarily or exclusively set aside for work. You complete some work at home, but will use a room with dual use e.g. living room or lounge room.

Now, on to what deductions you can claim!

What home office tax deductions can you claim?

There are a range of home office tax deductions that can be claimed - here is a simple table to show what you can and cannot claim in all three working scenarios:

Table courtesy of the ATO. Note 1: Generally, an employee who works at home and who does not have a dedicated work area will not be entitled to claim running expenses or their claim for running expenses will be minimal. This is due to the fact that they can only claim the additional running expenses incurred as a result of working from home.

For some examples, head to the Home Office Expenses section of the ATO website found here.

So, if you run some or all of your business from home, the kinds of deductions you may be able to claim include:

Running Costs.
Occupancy Expenses.

You may also be able to claim deductions for motor vehicle trips between your home office and other locations, if that travel is for business purposes.

If you’re entitled to goods and services tax (GST) input tax credits, you must claim your deduction in your income tax return at the GST exclusive amount.

Running costs

If you work from home, you can claim the proportion of running expenses applicable to your income-producing activities. These can include:

Heating, cooling and lighting.
Cleaning costs.
Home office furniture. This can include computers, printers, telephones, furniture and furnishings. You can claim the full cost if the item cost up to $300, or the decline in value if the item was over $300.
Repairs to home office equipment, furniture and furnishings.
Other running expenses including computer consumables (for example, printer paper and ink) and stationery.
Only the additional running expenses incurred as a result of working from home are deductible.

Remember, always retain your receipts in order to be able to claim a range of expenses in their entirety!

Calculating running costs

There are two ways to calculate running costs:

Claim a fixed rate of 52c per hour; or
Calculate your expenses in their entirety.

Fixed Rate

If you choose to claim the fixed rate deduction of 52c per hour of work you have completed from home, you must keep records of how many hours you actually worked from home for the year, or keep a diary for a representative four-week period to show your usual pattern of working at home. This covers the following:

Heating.
Cooling.
Lighting.
Cleaning.
Decline in value of furniture.

You will be required to figure out all other home work area expenses separately, including:

Phone and internet expenses.
Computer consumables and stationery.
Decline in value on computers or other equipment.

Calculate your expenses

If you wish to calculate your claim for running costs for your home business, you must keep your receipts for the following:

Home office equipment: any equipment used for work purposes.
Home office equipment repairs: any repairs that have been completed to the home office or furniture and equipment used for work purposes.
Cleaning: any cleaning expenses that have been incurred for the home office.
Any and all other running expenses that have occurred for the home office.

You must also keep all records for home expenses, such as:

A work diary setting out how much you used your equipment, home office and phone for business purposes over a (representative) four-week period.
Receipts or other written evidence (must include any depreciating assets you have bought).
Diary entries setting out small expenses ($10 or less) totalling no more than $200, or expenses you are unable to get evidence for.
Itemised phone accounts from where you can identify work-related calls, or other records, such as diary entries if you don't get an itemised bill.

For a comprehensive breakdown, head to the ATO website in relation to home office expenses.

Occupancy expenses

The other deduction that can be claimed is occupancy expenses. These include costs such as:

Rent.
Mortgage interest.
Property insurance.
Land taxes.
Rates.

As a general rule, employees can not claim occupancy expenses. There are only 2 circumstances in which you can claim a work-related portion of your occupancy expenses:

The area that you use to work from is not suitable for domestic use e.g. a dentist surgery, a doctor’s surgery or a hairdressing studio.
A work location is not provided to an employee by an employer and the employee is required to dedicate part of their home to their employer's business as a workspace – you can claim a section of these costs that relate to a clearly identified place of business.

It is worth noting that if you claim occupancy expenses, you don't qualify for the capital gains tax (CGT) main residence exemption for the part of your home that you use for work. If you use your home as a place of business there may be CGT implications when you sell it.

What if my home is not my principal place of business?

If you work from home, but your home is not your principal place of business, you can still claim some deductions as mentioned above. These include more specifically:

Other things to consider

Home office expenses calculator

The ATO has created a home office expenses calculator, which you can complete yourself in around 10-20 minutes. Remember, you must self-assess your eligibility and entitlement to a deduction for home office expenses before completing the calculator - check out the ATO website for more information: Home office expenses calculator.

Your business structure

If you run a home-based business, the way in which you calculate your expenses is dependent on your business structure. Deduction calculations from sole trader or partnership home-based businesses can differ from company or trust home-based business, so make sure you review this carefully. Two of the major differences between them are:

If your home-based business is run as a company or trust, it should have a genuine, market-rate rental contract (or similar agreement) with the property owner; and
If your home-based business is run as a company or trust, if there isn’t a genuine rental contract, there may be tax implications for you and the business for providing benefits to you.

It is worth noting that in both instances, if you earn personal services income (PSI), some occupancy expenses may not be deductible.

Take a look at the ATO deductions pages for a sole trader/partnership home-based business and for a company/trust for further information.

Capital gains and the main residence exemption

Generally, your principal place of residence ie. your home, is exempt from capital gains tax (CGT) - this is known as the main residence exception. If however you are using part of your home to produce income, such as running a business, you will not receive the full main residence exemption if:

You purchased your home on or after 20 September 1985; and
You would be allowed a deduction for interest (had you incurred it) on money borrowed to acquire the dwelling – this is the 'interest deductibility test'. Read more about the interest deductibility test on the ATO website.

To figure out any capital gains applicable, you generally need to know the market value of your home at the time you first used it to produce income.

Note: Irrespective of whether or not you have a work area set aside, if you own your home and are entitled to the main residence exemption from capital gains tax, this is not affected provided your home is not your principal place of business.

If you would like more information regarding home office tax deductions and how they are applicable to your circumstances, give Bottom Line Control a call on (07) 5471 7077 and our qualified team would be happy to assist.

Resources:

Australian Government - Australian Taxation Office (Home office expenses): https://www.ato.gov.au/Individuals/Income-and-deductions/Deductions-you-can-claim/Home-office-expenses/

‍Australian Government - Australian Taxation Office (Home office expenses calculator): https://www.ato.gov.au/Calculators-and-tools/Home-office-expenses-calculator/‍

Australian Government - Australian Taxation Office (Claiming a tax deduction for expenses for a home based business): https://www.ato.gov.au/Calculators-and-tools/Home-office-expenses-calculator/ ‍

Australian Government - Australian Taxation Office (Running your business from home): https://www.ato.gov.au/General/property/property-used-in-running-a-business/running-your-business-from-home/\

Australian Government - business.gov.au (Tax deductions): www.business.gov.au/Finance/Taxation/Tax-deductions‍

Australian Government - Australian Taxation Office (Working from home): https://www.ato.gov.au/general/property/your-home/working-from-home/‍

Australian Government - Australian Taxation Office (Using your home to produce income): https://www.ato.gov.au/general/capital-gains-tax/your-home-and-other-real-estate/your-main-residence/using-your-home-to-produce-income/‍

Finder (How to claim a home office): https://www.finder.com.au/how-to-claim-a-home-office

*Please note, this is a guide only and should be treated as such. You should always complete extensive research yourself and also obtain professional advice when it comes to home office tax deductions, as every set of circumstances is different and the information contained above may not be applicable to your needs.