How to maximise your tax deductions if you worked from home this year

If you worked from home this year, you might even be able to claim rent or mortgage costs.

There are two traditional ways for people to claim a tax deduction relating to their work from home expenditure, and also a ‘shortcut’ method.

Initially designed to be a temporary measure while Covid-19 lockdowns were in place over the past two years, work from home arrangements are now becoming a permanent fixture at workplaces across the country.

In fact we can see the change in a range of property statistics. Just take a look at the level of subleasing in the Sydney CBD, for example: the volume of space suddenly empty of workers now looks to be holding at around four times higher than it was pre-Covid.

It is easy to overlook one of the most important personal impacts of this: the tax deductions that people should be claiming for the extra expenses incurred while working from home.

There are two traditional ways for people to claim a tax deduction relating to their work from home expenditure: the fixed rate method and the actual cost method.

Separately, there is another method that was introduced by the ATO during Covid-19 lockdowns as a ‘‘shortcut’’ method, allowing taxpayers to claim a flat 80c per hour while working from home to cover expenses incurred such as electricity, cleaning, internet, stationery and computer costs.

The application of this is quite simple. You simply multiply the number of hours you worked from home by 80c to work out the tax deduction for the relevant financial year. This method can be applied until June 30, 2022; however, some accountants warn about its use.

Gavin Bateman, director and tax agent at Dolman Bateman accountants in Sydney, says: “People need to carefully assess the various work-from-home tax deduction methods available and decide which is the most appropriate for them. For instance if you use the $0.80 shortcut method you cannot include any other expenses, and in my experience it rarely seems to work out better than the other two methods.”

However, the shortcut method may appeal to those who do not have the time or inclination to keep logbooks and receipts to substantiate their expenses incurred while working from home. For those who are more organised and have records and receipts, the other methods may be appealing.

Bateman says: “I normally use the fixed rate method of 52c per hour, as you can also claim a percentage of other costs such as phone, internet and computer ­depreciation.”

The fixed rate method is like a hybrid model where you have a fixed 52c per hour component for things such as electricity, gas and cleaning, but also a variable component to claim expenses relating to phone, data and internet expenses and depreciation on some items such as computers and ­laptops.

And at the other end of the spectrum sits the actual cost method, where you have to keep track of all work-from-home expenditure. It’s available for those with impeccable records who can substantiate all work-from-home ­expenses.

Of note, both the fixed and actual cost methods require you to keep track of work versus personal use of tax-deductible expenses as well as the proportion of time you spent working from home.

Outside these three methods is a separate issue relating to working from home, which can lead to another large tax deduction if you qualify. Timothy Ricardo, director of Bishop Collins Chartered Accountants, says: “A common question people ask is whether they can claim rent or home loan repayments and associated ownership costs such as rates and water when working from home. It is not as easy as you may think and in most cases employees will not be able to claim occupancy expenses.

“To make a claim, you need to prove that you are working from home because your employer does not provide you with an alternative work location and that you have a dedicated area in your home that is exclusively used for work purposes.”

The ATO are very strict on this. Their website uses a case study where the work room is locked when not in use and where the employer pays for health and safety checks on the workroom at home.

But if these hurdles are met, the tax deduction for rent or the home ownership costs can be apportioned on a floor space basis. If you live in a 200sq m house and your dedicated work room is 20sq m, you could claim 10 per cent of rent or mortgage and outgoings.

Consulting a tax agent for the upcoming tax return for 2021-22 is likely to be a good idea, as the work-from-home tax deduction rules require careful navigation. For instance, things you may assume would be tax-deductible are not, such as coffee, tea, milk and other general household items, even if those items are paid by your employer at the office.

In addition, given the various methods and significant tax deductions up for grabs, the difference in tax deductions could be large – especially if you have spent a significant proportion of time working from home in recent times.

James Gerrard is principal and director of Sydney financial planning firm www.financialadvisor.com.au