Don’t let the new work from home tax rules catch you out

Changes to the way you claim working from home deductions are set to impact millions of taxpayers, particularly the small business community of solopreneurs, freelancers and contractors who conduct all or part of their business from home. Mark Chapman, Director of Tax Communications with H&R Block Australia, explains what you need to know.

The Australian Taxation Office (ATO) has changed the way that taxpayers claim deductions for costs incurred when working from home – and the rules have got substantially more complicated.

The new rules were introduced on 16^th February 2023 but are applicable from 1^st July 2022. From that date, the shortcut method (80 cents per hour) and the old fixed rate method (52 cents per hour) can no longer be claimed.

Revised fixed rate method

The revised fixed rate method applies from 1 July 2022 onwards. The amount of the fixed rate is 67 cents per hour.

What’s covered by the rate

The revised fixed rate of 67 cents per work hour covers:

Energy expenses (electricity and gas)
Phone usage (mobile and home)
Internet
Stationery and computer consumables

No additional deduction for any expenses covered by the rate can be claimed if you use this method.

For the first time, phone usage and internet expenses are included in the fixed rate method. These were previously excluded from the fixed rate method, which allowed a separate deduction to be claimed for these expenses. Note that under the new rules, if you use your mobile phone for work purposes when you are out-and-about, as well as at home, you can no longer claim a separate deduction for this use and still use the fixed rate method. If you wish to claim actual use of your mobile phone (or home internet), you must claim using the actual method for all working from home expenses (see below).

What can be claimed separately

The decline in value of assets used while working from home, such as computers and office furniture.
The repairs and maintenance of these assets.
The costs associated with cleaning a dedicated home office.

Home office

The revised fixed rate method doesn’t require that you have a dedicated home office space to claim working from home expenses. So, if you work from the kitchen or living room, you can still claim a deduction.

Person working on laptop at desk at home

Compliance and substantiation

The biggest burden of the new fixed rate is the amount of substantiation required to claim.

You need to keep a record of all the hours worked from home for the entire income year. This obligation kicks in from 1 March 2023. Before then, a 4-week representative diary or similar document will be required for the period 1 July 2022 to 28 February 2023.

The ATO won’t accept estimates, or a 4-week representative diary or similar document, for any period after 1 March 2023.

Records of hours worked from home can be in any form, provided they are kept as they occur. For example, timesheets, rosters, logs of time spent accessing employer or business systems, or a diary for the full year.

In addition, records must be kept for each expense that you have incurred which is covered by the fixed rate per hour. For example, if you use your phone and electricity when working from home, you must keep one bill for each of these expenses.

Actual cost method

The actual cost method hasn’t changed. You can claim the actual work-related portion of all running expenses. To claim this method, you must have an area set aside as a dedicated home office.

Compliance obligations include keeping detailed records for all the working from home expenses being claimed, including:

All receipts, bills and other similar documents to show you have incurred the expenses
A record of the number of hours worked from home during the income year (either the actual hours, or a diary or similar document kept for a representative 4-week period to show the usual pattern of working at home).
A record of how you have calculated the work-related and private portion of the expenses (for example, a diary or similar document kept for a representative 4-week period to show the usual pattern of work-related use of a depreciating asset, such as a laptop).

Many taxpayers find the substantiation requirements involved in claiming the actual cost method burdensome and time consuming, hence the popularity of the fixed rate. But now, the fixed rate comes with its own burdensome compliance obligations, which is bound to prevent many taxpayers from claiming at all.

Working with a dedicated tax agent such as H&R Block can help you make sure you get your tax obligations right.

This article was first published on Flying Solo, read the original here.

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