Tax time: best way to make WFH tax deductions

Avoiding this shortcut and putting in the extra work could make a huge difference to what you get back. Find out how to do it.

Aussies can score an extra $1000 in deductions on their tax return as a result of a huge trend that has swept the country – working from home.

While there’s a number of methods to make the claim, one is guaranteed to get you more, according to Mark Chapman, director of tax communications at H&R Block.

“Tax deductions for working from home have been the big growth area this year, while tax deductions for motor vehicle use, accommodation and travel are well down,” he said.

The Australian Taxation Office offers a “shortcut method” of 80 cents per hour for working from home deductions, but the catch all systems means you could be missing out.

Alternatively, you can use the ATO’s existing flat rate allowance for working from home of 52 cents per hour that could deliver more in returns, Mr Chapman said.

There are a number of different ways to claim WFH tax deductions. Picture: iStock

What can you claim as a WFH deduction?

You can claim a tax deduction for the work-related proportions of household costs for a number of things.

These include heating, cooling and lighting bills and the costs of cleaning your home working area, including cleaning products or payment for a domestic cleaner if required.

There’s also depreciation of home office furniture and fittings and even costs of repairing the equipment. You can also claim depreciation of office equipment and computers.

Small capital items such as furniture and computer equipment costing less than $300 can be written off in full immediately, while computer consumables like printer ink and stationery can also be claimed as a deduction.

There’s also phone, including mobile and/or landline costs, and internet expenses that can also be put on your deductions list.

There are many things you can use as deductions for WFH. Picture: Supplied

The different methods

If you claim using the 80 cents per hour formula, you will need to keep a record of the number of hours you have worked from home as a result of Covid-19, Mr Chapman said.

But you can’t make any other claims in relation to working from home, so items like mobile phone and internet usage are included in the 80 cent rate, he warned.

The flat rate allowance for working from home of 52 cents per hour covers the extra costs of heating, cooling, lighting and the decline in value of furniture, he explained.

“All you need to do to claim this is to keep a diary – note the time you start work each day, the time you finish work each day and any breaks. You can then claim 52 cents per hour for each working hour,” he said.

“In addition — and this is what makes this rate different to the 80 cent rate — you can also make separate claims for the work-related proportion of items such as your home internet, mobile phone costs, depreciation of computer equipment and stationery.

“These additional costs often make this a preferred method since the size of the claim is often much larger than using the 80 cent rate.”

Record keeping is extremely important. Picture: iStock

There’s a further option too where you can claim the actual costs you’ve incurred, but it also involves a fair bit more work.

“You’ll need to keep a diary of your work from home hours for a typical 12 week period and you’ll also need to work out the amount of your home by floor area that you’re using as your work space,” Mr Chapman noted.

“From this, you can then work out the work-related proportion of your household expenses and apply this percentage to the actual amount you spend on electricity, gas, water, phone and internet.

“You’ll also need to keep all the original bills to prove your claim. This generally produces a bigger claim than either of the flat rate methods but the amount of paperwork and calculation involved is much greater.”

On average, people who have been working from home all year can expect a deduction of about $1500 using the 80 cents per hour rate, he said.

“However, average deductions for those who claim the 52 cent rate plus additional deductions for phone, internet, stationery and depreciation of phone equipment are at least $2600. That’s a sizeable difference which translates into – on average – a tax saving of over $350,” he said. “If you use the actual rate, your deduction is often even bigger, averaging over $3000 if you’ve worked from home all year.”

Work out which method is better for you. Picture: Supplied

An easy extra $1000

The low- and middle-income tax offset is also worth an easy $1000 when you lodge your tax return, Mr Chapman said.

If your taxable income is up to $126,000, you will get some or all of the low- and middle-income tax offset, he said.

Here’s how it works.

Basically, if your income is less than $37,000, you will receive $255.

If your income is between $37,001 and $48,000, the tax offset will increase steadily to $1080. Between $48,000 and $90,000, you will get the maximum of $1080.

Earn more than $90,000, and the offset gradually phases out, disappearing after $126,000.

You must lodge your tax return in order to get the offset.

Winners and losers for the coming financial year

People earning between $45,000 and $90,000 are set to rewarded in the coming year when it comes to their taxes, according to Mr Chapman.

“The combination of the tax cut in last year’s budget and the extension of the low and middle income tax offset means that they are $2160 better off this year,” he said.

H&R Block’s Mark Chapman said low and middle income earners are winning with tax cuts. Picture: Supplied

Small companies have also been giving a tax lifeline. The rate of corporate tax has gone down by 1 per cent from 1 July 2021, meaning that it is now 25 per cent, which is good for investment and productivity, Mr Chapman said.

But it’s not all good news.

The shareholders of small companies are one of the losers. If they receive dividends, they will be franked at a maximum of 25 per cent, meaning that they have more personal tax to pay, Mr Chapman warned.

“The sleight of hand of company tax cuts is that while it leads to less tax for the company, it also leads to higher taxes for shareholders – therefore, on balance, its less of a tax cut and more of a tax redistribution,” he explained.

People who claim for work related car use, accommodation or travel are also losers, he added, as the pandemic will almost certainly have massively reduced the size of your claim.

Originally published as Tax time: best way to make WFH tax deductions