9 Steps To Claiming Home Office Expenses At Tax Time

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Working from home comes with a unique set of perks, one of which is the ability to claim home office expenses as tax deductions on your tax return.

But what expenses are you able to claim?

This blog post will show you how to claim your work-from-home expenses in a way that puts the most money in your pocket.

Remember that these are general guidelines – always speak to an accountant or tax specialist to find out precisely what you are eligible for.

(Related: Ultimate Home Office Setup Guide).

1. Ensure That Your Home Office Expenses Are Eligible.

To claim WFH expenses on your tax return, you must clear ATO’s first eligibility test, which says:

Once satisfied that your home office expenses clear this eligibility hurdle, you must divide them into one of two categories.

(Related: Best Small Business Accounting Software).

2. Classify Your Expenses Correctly.

Broadly, your home office deductions fall into occupancy expenses (can only be claimed in specific situations – see below) and running expenses.

Let’s examine each in detail.

Examples Of Running Expenses:	Examples Of Occupancy Expenses:
Electricity charges for heating/cooling	Rent
Electricity charges for lighting	Mortgage interest
Cleaning costs	Land taxes
Depreciation (e.g. for office desks and laptops)	House insurance premiums
Cost of repairs to furniture	Water rates

A. Home Office Running Expenses.

Running expenses are the ongoing costs associated with running your home office and can be claimed regardless of whether you work from home permanently or occasionally.

These include costs like:

B. Home Office Occupancy Expenses.

Occupancy expenses are associated with owning or renting your home. They’re not affected by your income-earning activities. They include:

3. Decide Which Expenses You Can Claim.

If you work from home, you’ll probably be able to claim at least some of your running expenses.

Occupancy expenses are more tricky to claim, and you’ll only be able to deduct those if you satisfy ATO’s strict eligibility criteria. In a nutshell, the more substantial your home office is, the more you’ll be able to claim.

Use the table below to find out what you can claim:

Type Of Expense	An Area Of The Home Is A Place Of Business	Dedicated Room Used As A Study Or Home Office	Work Done At Home Not In A Specified Area
Running Expenses	YES	YES	YES
Occupancy Expenses	YES	NO	NO

As a rule of thumb:

Of course, there are always exceptions, so consult your accountant for the final word on your eligibility.

(Related: Best 13 Home Business Ideas For 2024).

4. Don’t Get Caught Claiming In Excess.

The ATO is cracking down on “ambitious” claims, so make sure your tax return aligns with reality.

For example, you may be tempted to claim occupancy costs, even if you work from the kitchen table or a spare room a few times per week as a salaried employee.

Yet, the ATO is quite clear here – to claim occupancy costs, it expects you to have an area of your home set aside exclusively for business purposes.

5. Choose The Best Claim Method.

You can claim a deduction for your home office using one of two methods. Each method has specific pros, cons and eligibility criteria.

We will demonstrate the effectiveness of each method in a hypothetical real-life example, where Tom works from home as a cryptocurrency trader, in a dedicated room, for 20 hours per week.

He spends the other 20 hours of his workweek in Sydney’s PwC headquarters as a senior analyst.

Per our guidelines above, he is eligible for running expenses but not occupancy expenses. Here’s a summary of deductions that Tom plans to make:

1. The Fixed-Rate Method.

Most WFH professionals use this method for claiming expenses on their tax returns because it yields great returns without being overly complex.

It is comprised of two steps.

To use the fixed-rate method, you must:

Pros.

You can claim a deduction for running expenses without the need to keep records.

However, you need to provide proof of the hours you’ve spent working from home (by keeping a diary or a timesheet).

Cons.

You will need to set aside a dedicated area in your home for your WFH activities. A dining table doesn’t count.

This method is more clunky because you will need to separately calculate your work-related use of equipment (laptops, standing desks, office chairs, headphones, etc) and show the work-related portion of running expenses like phone bills.

How Much Will You Get?

Tom gets only $520 for his hours worked (which is $280 less than what he’d get using the Shortcut Method) and can claim a portion of his phone and internet expenses, as well as the depreciation of his laptop.

Description:	Total:
20 hours per week X 52 cents X 50 weeks	$520
70% of the $1600 annual phone bill	$1120
50% of the $1200 annual internet bill	$600
Decline in value of laptop ($667 over 3 years)	$667
Tom’s Total Claim For Working From Home	$2907

Unfortunately, Tom doesn’t get full deductions for the $2000 he has spent on his beautiful standing desk and $1500 on his ergonomic office chair – because office furniture is included in the 52 cents per hour figure when using the Direct Method.

To sum it up, if you have any significant phone bills, internet bills or equipment purchases that you can claim, and you haven’t spent massive amounts of money on the fit-out of your home office, the Fixed Rate method is a good fit for you.

Who Can’t Use This Method?

Don’t use this method if you:

Learn more about the fixed rate method here.

2. The Actual Cost Method.

Using the actual costs method, you don’t start with a baseline “cents per hour worked” deduction.

Instead, you simply calculate all expenses that you have incurred to produce your income when working at home, from scratch.

This can include almost all running and occupancy expenses:

Pros.

This method has the potential to maximise your return.

For example, if you have a dedicated home office and incur high electricity costs due to running multiple computers or other equipment, the Actual Cost method will likely result in a higher deduction than the other two methods.

Cons.

The main downside of this method is the amount of record-keeping required. You will need to keep receipts for all expenses related to your home office, including:

Learn more about the actual cost method here.

How Much Will You Get?

Using Tom as an example again, the calculations look even more promising:

Description:	Total:
Electricity for heating/cooling (15c per hour for 20 hours x 52 weeks)	$151
Electricity for lights and electrical equipment (5c per hour for 20 hours x 52 weeks)	$52
Decline in value of standing desk ($400 over 5 years)	$400
Decline in value of ergonomic chair ($300 over 5 years)	$300
Decline in value of laptop ($667 over 3 years)	$667
70% of the $1600 annual phone bill	$1120
50% of the $1200 annual internet bill	$600
Tom’s Total Claim For Working From Home	$3290

Tom has significant energy expenses and a beautiful, ergonomic home office setup. He is able to get maximum deductions for those expenses using the Actual Cost method.

3. The Shortcut Method.

The shortcut method was temporary (introduced by the ATO in response to COVID-19) and ended on the 30th of June 2022.

It was a quick and easy way to calculate your deductions for work-related expenses; you could use the shortcut method to calculate your deductions:

This included time spent working overtime, on weekends and public holidays.

However, you needed to provide proof of the hours you’ve spent working from home (by keeping a diary or a timesheet).

With this method, you could claim 80 cents per hour that you worked from home during the relevant period.

Pros.

The shortcut method was the best option if you didn’t have records of your expenses, if your claim was for a small amount, or if you didn’t want to waste time hunting through shoe boxes of receipts.

You simply had to produce a timesheet, roster or diary that shows the number of hours you’ve worked from home.

Cons.

The biggest downside of this method was that it didn’t always give you the biggest tax return.

It’s was also not suitable for calculating occupancy costs.

If you thought you may have been entitled to claim those, or you have a lot of running costs to claim, you should have used the fixed-rate method or the actual cost method (see above).

How Much Will You Get?

Using the temporary shortcut method, Tom got a generous 80 cents per hour worked at home, but couldn’t claim any individual deductions such as equipment depreciation and phone and internet expenses.

Description:	Total:
20 hours per week X 80 cents X 50 weeks	$800
No phone, internet, computer equipment or home office furniture can be claimed as it’s included in the 80 cents	$0
Tom’s Total Claim For Working From Home	$800

Learn more about the shortcut method here.

(Related: Tips For Better Home Office Lighting).

7. Check If You Can Claim Mortgage Interest.

Interest on your mortgage is a form of occupancy cost and, therefore, can only be claimed in limited circumstances.

Specifically, to make a mortgage interest deduction, your home office/business must pass the ‘interest deductibility test‘ set by the ATO:

8. Ensure That You’re Not Claiming For Ineligible Home Office Expenses.

Not all purchases are created equal. You can’t claim a deduction for the following home office expenses:

(Related: The Only Work-From-Home Checklist You Need).

9. Provide Records To Support Your Claims.

Records required by the ATO will largely depend on your chosen claim method.

Predictably, the more sophisticated the method, the more records you’ll need to produce.

Record	Shortcut	Fixed	Actual
Itemised phone accounts	NO	YES	YES
Records of internet costs	NO	YES	YES
Records of cleaning costs	NO
Diary entries that show hours worked*	YES	YES	YES

What Deductions Can You Claim As A Business Owner?

It’s quite feasible that you’ll be able to claim home office running expenses and occupancy expenses.

You can use any of the 3 methods to claim your deductions for working from home.

Learn more about how to claim a deduction for a home-based business here.

Is Working From Home Here To Stay?

Probably. Entirely new patterns of work are emerging.

Many employees are reluctant to give up the flexibility afforded to them by the COVID pandemic, with two-thirds wanting to continue working at least partially from home.

In response, many companies have announced that they will be permanently instituting WFH policies.

Even though the technology that enables WFH existed pre-pandemic, very few people with serious career aspirations entertained it as an option.

Workplace management techniques, cultural standards, and the stigma surrounding working from home may have discouraged remote employment.

As the CEO of Morgan Stanley explained in 2020:

Yet, two short years later, in 2022, most CEOs have a cautiously optimistic view of WFH arrangements.

Hybrid work models are emerging as the best compromise, at least in the short to medium term.

The End Of The 5-Day Commute.

According to research by the Australian Productivity Commission, the daily commute to the office imposes a substantial, yet invisible, tax on employees.

Australians in major cities spend around 67 minutes per day commuting. This translates to $49-57 in foregone earnings per day.

Deleting this tax through higher retained earnings or more free time will be a welcome change.

The Dark Side Of WFH.

Work-from-home arrangements are not without issues.

For example, they have already been shown to ratchet up online disinhibition, which correlates highly with bullying.

Managers and executives will need to work hard on identifying and preventing these unintended consequences.

	Employees:	Employers:
Benefits	No commute Reach global labour markets Tax deductions on home office	Cost savings Reach global talent
Challenges	Working too much Lack of community Bullying	Building trust Remote collaboration

Meanwhile, a recent survey has revealed that many employees feel more tired and less engaged when juggling work and family obligations.

Ironically, the working hours of many employees have increased more than their commuting hours have decreased. This resulted in a net negative amount of time for family and friends.

The most brutal examples of this trend have appeared in China, where 12-hour workdays, 6 days per week became the norm until the Supreme People’s Court intervened.

Irene