With the explosion in numbers of people now working from home due to COVID-19, the ATO has changed the tax deduction for work related expenses significantly.
But what do these changes mean for your 2020 tax claim on home office expenses?
Well first up, it is important for you to know that in order to claim a deduction, the following three golden rules must apply:
- You must have spent the money
- The expenses must be directly related to your income
- You must have the records to prove it.
This means, that if your employer has provided you with items or you have been reimbursed for the expense, you cannot claim a deduction.
However, if your employer gives you an allowance to cover your expenses when you work from home, this allowance must be included as income in your tax return and you can claim the deduction.
How will my expenses be calculated?
To make things easier, the ATO has introduced a new simplified method known as the shortcut method which will help when calculating the additional running expenses from 1 March 2020 until 30 June 2020.
What is the shortcut method?
The Shortcut method allows you to claim a deduction of 80 cents for every hour you have worked at home due to COVID-19, as long as you are:
- Working from home to fulfil your employment duties and not just carrying out minimal tasks such as checking emails and taking calls
- Working from home has resulted in incurring additional deductible running expenses.
As specified by the ATO the Shortcut method covers the following expenses. You do not have to incur all these expenses. But you must have incurred additional expenses, such as the ones below, as a result from working at home during COVID-19:
- the decline in value and repair of capital items, such as furniture in your home office
- cleaning costs
- your phone expenses, including the decline in value of the handset
- your internet expenses
- electricity and gas expenses for lighting, cooling or heating and running electronic items used for work (for example your computer)
- computer consumables, such as paper
- the decline in value of a laptop, computer or similar device
What records must I keep if I want to use the Shortcut Method?
If you use the shortcut method you ONLY need to keep a record of the hours you have worked from home as a result of COVID-19 e.g timesheets, diary notes, and rosters.
You don’t even have to have a separate or dedicated area of your home set aside such as a study.
What are the other calculation methods available?
There are two other methods used to calculate home office expenses and they are the methods used prior to COVID-19. These included:
- The Fixed Rate Method. This method involves claiming all or a mixture of the following;
- A deduction of 52 cents per work hour to cover expenses such as heating, cooling, lighting, cleaning and the decline in value for office furniture
- The work related percentage portion of your actual costs of expenses not included above, such as phone and internet expenses, computer consumables and stationery.
- The work related portion of the decline in value (depreciation) of a computer, laptop or similar device
- The Actual Cost Method. This method allows you to claim the actual work related portion of all your running expenses. In order to calculate a reasonable basis for this method, it is crucial you have a home office diary. This method can also only be used if there is a dedicated area set aside as your home office.
What Records must I keep for these two methods?
These two methods require a lot more detailed records to be kept. Although regardless of the method you choose you must have the records to prove it.
- You will need to keep a diary for a four week period which you think accurately represents your use of the home office for the whole year.
- Keep all of your receipts for expenses. In order to avoid fading receipts, it may be useful to scan them.
If you continue to use these two methods instead of the Short Cut Method for the time you worked at home during COVID-19 you will need to:
- Complete a new four week representative period diary to show your usage in your new circumstances
- Keep separate records for the period your circumstances changed
So with all three methods which one is best for me?
If the only time you have worked at home was due to COVID-19, then in your 2020 tax return the Short Cut method will be the easiest and simplest way of claiming a deduction. As the ATO believes that the Short Cut Method is simpler, will reduce the chance of mistakes being made which would in turn cut down the need for reviews and audits.
If you had previously worked at home before COVID-19 which increased as a result of COVID-19, Baggetta & Co will help assess which option or combination of methods is better for you. Although the below example will help make it clear.
If you had previously worked at home prior to COVID-19, from 1 July 2019 – 29 February 2020 (or the date you stopped going into the office) you will calculate your expenses using the fixed rate or actual cost method based off your 4 week diary, which averages out your working from home hours for the year. This will be done like previous years, before the COVID-19 pandemic.
For the period 1 March 2020 – 30 June 2020, when you began working from home more frequently, you have a variety of options available to you.
- You stop using the fixed rate and actual cost method and use the shortcut method. Although this means that you can no longer separately claim additional expenses such as internet or mobile phone as these expenses are all included in the shortcut method.
- As a result of working from home more, you may find that your work related percentage for additional expenses has increased. This means that it may work out better for you to continue with the fixed rate method although adjust your work related percentage, based off your new COVID-19 work diary.