In recent years, the rise of remote work has become increasingly prevalent, with many Australian small business owners transitioning to home-based offices, as well as many new ventures beginning from a home-office base.
Working from home offers flexibility and convenience, not to mention cost-cutting when it comes to rental expenses. It also presents opportunities for tax deductions.
Here, we explore the various tax deductions available to small business owners who work from home, and other key details. We’ll look at:
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What tax deductions are, and who is eligible to claim working-from-home tax deductions
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The Fixed Rate method of tax deductions
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The Actual Expenses method of tax deductions
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The no-longer-applicable Shortcut method
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Common home expenses you may be able to claim as tax deductions if you work from home
Understanding Working-From-Home Tax Deductions and Who is Eligible for Them
Tax deductions for business owners are the eligible expenses incurred while running a business, which may offset your tax liability.
To claim expenses for working from home, you need to meet the following criteria:
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You must be working from home to fulfill your employment duties, not just doing minimal tasks like occasionally checking emails or taking calls.
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There has to be additional running expenses because of working from home.
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Also, you must have records that demonstrate you incur these expenses.
If you incur running expenses for both private and work purposes, you’ll need to apportion your deduction. You can only claim the portion related to your work as a deduction.
The Australian Tax Office (ATO) offers two primary methods for claiming tax deductions for home office expenses: the Fixed Rate method and the Actual Expenses method.
Fixed Rate Method
With the Fixed Rate method, you can claim a rate of 67 cents per hour worked at home.
This rate covers additional running expenses, such as electricity and gas, phone and internet usage, stationery, and computer consumables.
It’s important to note that you cannot claim a separate deduction for these costs elsewhere in your tax return.
However, you can still separately claim any depreciating assets used for work, such as office furniture or technology.
For assistance with this, check out the ATO’s handy depreciation and capital allowances tool.
With the Fixed Rate method, you’ll need to keep records of:
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The total number of hours worked from home throughout the entire year.
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The additional running expenses covered by the fixed rate per hour that you incurred, such as phone bills and electricity bills.
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Any depreciating assets used for work purposes and the portion of their use that was work-related.
Actual Expenses Method
Alternatively, you can choose to claim deductions using the Actual Expenses method, which requires you to calculate the specific costs associated with your home office.
You can claim a portion of your home office expenses based on the percentage of your home used for business purposes.
This includes expenses such as rent, mortgage interest, utilities, internet, phone, and depreciation of office equipment.
To calculate the percentage of your home used for business purposes, you’ll need to measure the area of your home office and divide it by the total area of your home.
Keep detailed records of your expenses, including receipts and invoices, to substantiate your claims.
Common Home Office Expenses
Now, let’s break down some of the most common home office expenses that may be deductible for small business owners.
Rent or Mortgage Interest
If you’re renting your home or paying a mortgage, you can claim a portion of these expenses based on the size of your home office.
Utilities
This includes electricity, gas, and water bills. You can claim the portion of these expenses that relates to your home office.
Internet and Phone
If you use the internet and phone for business purposes, you can claim a portion of these expenses.
Office Equipment and Furniture
This includes items such as desks, chairs, computers, printers, and office supplies.
You can claim depreciation on the cost of these items over time.
Cleaning and Maintenance
If you incur expenses for cleaning and maintaining your home office, such as cleaning supplies or repairs, you may be able to claim these costs.
Record-Keeping Requirements
Regardless of which method you choose to claim deductions, it’s essential to keep accurate records of your home office expenses. This includes:
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Records of the hours you worked from home (for the Fixed Rate method).
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Receipts and invoices for expenses incurred.
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Documentation supporting the percentage of your home used for business purposes.
Working from home offers many benefits for Australian small business owners, including tax deductions for home office expenses.
Whether you choose the Fixed Rate or Actual Expenses method, it’s essential to understand the rules and requirements set forth by the ATO to ensure compliance and maximise your deductions.
By keeping accurate records and seeking professional advice if needed, such as from your accountant or bookkeeper, you can take full advantage of the tax benefits available to you while enjoying the flexibility of remote work.
Shortcut Method No Longer Applicable
Please note that the Shortcut method of calculating 80 cents per hour that was introduced during COVID to help SMEs get their tax done efficiently when so many people were working from home is no longer valid.
It was only temporary and was applicable for deductions on work-from-home expenses between 1 March 2020 to 30 June 2020 in the 2019–20 income year and for the 2020–21 and 2021–22 income years.
Source: MYOB May 2024
Reproduced with the permission of MYOB. This article by Kellie Byrnes was originally published at https://www.myob.com/au/blog/working-from-home-tax-deductions-for-business-owners/
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