Learn how it could help maximise your tax refund.
Are you like many Australians who have worked from home during the COVID-19 pandemic? If yes, you may be entitled to claim work from home deductions on your 2020, 2021 and 2022 tax return. The bonus: you could end up with more money in your pocket at tax time!
But, before you calculate your work from home deductions, it’s important to know about some recent changes made by the ATO that could impact just how much you can claim.
There is now a new method you can use to calculate your work from home expenses
Which method is best for you?
The ATO recently announced a new method aimed at making it easier for people who are new to working from home to make a claim.
Coined the “shortcut method” this new method allows you to claim 80c per hour for each hour worked from home, from 01 March 2020 to 30 June 2022, so it applies to the following income years:
- 2019/20 income year – from March 01 2020 to 30 June 2020
- 2020/21 income year – 01 July 2020 to 30 June 2021
- 2021/22 income year – 01 July 2021 to 30 June 2022
To calculate if the new “shortcut method” or the existing “fixed rate method” is the right one for you, let’s take a look at each one. Depending on your circumstances, choosing the wrong method means you could cheat yourself out of big dollars on your tax return.
Fixed rate method
You can claim 52c per hour you work from home. Plus, you can separately claim the work-related portion of your phone, internet, computer depreciation and other expenses.
The “shortcut” method: the new way
Similar to running expenses, under this method (available only from March 2020 onwards) you can claim 80c per hour. But, and this is important, it excludes all of your other deductions relating to work from home! You can’t claim other work from home items like phone, internet, stationery or furniture/equipment depreciation separately.
The ATO promotes this “80 cents” method, but for most people it results in a smaller tax refund.
The “occupancy expenses” method: the other existing method
For simplicity this article only compares the “fixed rate” method and the new “shortcut” method. There is a third, more complicated method of claiming home office expenses available. This method is only available is you permanently work from home on and ongoing basis, so doesn’t apply for COVID-19. To read more about this method click here.
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Let’s compare Running Expenses Fixed Rate vs the Shortcut Method
Example 1 – New “Shortcut Method” is Best
Oliver is a recruitment consultant who now works his 40 hours per week from home instead of the office. He has a company laptop and company mobile phone, but uses his home internet that he shares with his wife. He calculates his Internet use is 55% work related.
Running Expenses (the existing method):
- Oliver can claim 40 hours per week x 52c x 16 weeks (March – June) = $332.80
- Oliver’s monthly Internet bill is $80 a month which he shares with his wife 50/50.
- Therefore, Oliver’s share of the internet bill is $40 and he can claim 55% of that amount for 4 months = $88
- As Oliver has a company issued computer and phone, he can’t claim either of those items on his return as he doesn’t personally pay for them.
- Oliver’s total work from home claim for March – June = $420.80
Shortcut method (the new method):
- Oliver can claim 40 hours per week x 80c x 16 weeks = $512
- Oliver can’t claim his internet as it’s included in the 80c per hour rate.
In this case Oliver’s work from home deduction claim would be $91.20 higher by claiming the new Shortcut method.
Example 2 – Running Expenses Fixed Rate Method is Best
Evie is a town planner who lives alone and now works her 38 hours per week from home instead of the office. She keeps track of her work related mobile phone and internet use for one month during May and works out that 55% of her mobile phone use is work related and her internet use is 50% work related. Let’s compare the two methods for Evie:
Running Expenses (the existing 52c method):
- Evie can claim 38 hours per week x 52c x 16 weeks (March – June) = $316.16
- She can claim 55% of her $99 monthly phone bill x 4 months = $217.80
- Evie can claim 50% of her $80 monthly internet bill x 4 months = $160
- Evie’s total work from home claim for March – June = $693.96
Shortcut method (the new 80c method):
- Evie can claim 38 hours per week x 80c x 16 weeks = $486.40
- Evie can’t claim phone or internet as it’s included in the 80c per hour rate.
Therefore, in this case, Evie’s work from home deduction claim would be $207.56 higher by claiming the existing Running Expenses rate of 52c per hour, and her phone and internet separately.
Which method works for me?
As you can see from the above examples, it comes down what work from home expenses are covered by your employer vs which ones you pay for yourself. In circumstances where an employer covers everything, the new 80c method might work for you, but for most people where their expenses come out of their own pocket, the original Running Expenses method gives a better tax refund.
It’s important to note, as with any deduction on your tax return, the standard deduction rules apply:
- You must have paid for the expense out of your own pocket,
- It must be directly related to your work, and
- You can’t have been reimbursed for the expense already.
Common mistakes people make when claiming working from home expenses
Forgetting to apportion shared bills: People mistakenly claim their entire monthly bill even though the cost of that bill is shared with others. For example, if you live in a share house with 2 other people and you split the monthly internet bill of $120 equally, then your share is $40 per month. That is the amount you use to work out your claim, not the full $120.
Not understanding how depreciation rules work: If you purchase a work-related item such as a laptop that costs more than $300 you can’t claim it in full on your next tax return. Instead, it is claimed over the ATO defined working life of the item. Assets you purchase (desks, computers, printers etc) all have different “working lives” so it’s important to check with your accountant about this one.
Claiming home office expenses when you don’t have a dedicated room or office in your home: While the ATO has relaxed this requirement for “Shortcut Method”, to claim any home office expenses from prior to March 2020 you must have a dedicated room or office in your home. The kitchen table or couch, doesn’t count.
That’s ok, we are here to help! If you’re unsure how to maximise your claim, our Etax Accountants are ready to help. Simply use the live chat or message function in your Etax account and let us know how we can help!