9 Steps To Claiming Home Office Expenses For A Maximum Tax Deduction

More dough in your pocket.

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home-office-expenses
Irene McConnell
10 min read

April 19, 2022

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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.

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1. Check That Your Home Office Expenses Are Eligible For Deduction.

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

  1. You must have spent the money yourself and not have been reimbursed.
  2. The claim must be directly related to earning your income.
  3. You must have a record to substantiate the claim.

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

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 ExpensesExamples Of Occupancy Expenses
Electricity charges for heating/coolingRent
Electricity charges for lightingMortgage interest
Cleaning costsLand taxes
Depreciation (e.g. for office desks and laptops)House insurance premiums
Cost of repairs to furnitureWater rates
Running versus occupancy expenses.

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:

  • heating & cooling
  • lighting your home office space
  • work-related calls
  • work-related internet usage
  • the decline in value of office equipment like computers and printers
  • the cost of repairs to office furniture

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:

  • mortgage interest
  • rent
  • council rates
  • house insurance premiums
  • body corporate fees (if you live in an apartment)
  • land taxes (if you own your home)

PRO TIP: Keep good records if you plan to claim occupancy expenses on your tax return. The ATO will require evidence that you are using part of your home specifically for work and business purposes.

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 ExpenseAn Area Of The Home Is A Place Of BusinessDedicated Room Used As A Study Or Home OfficeWork Done At Home Not In A Specified Area
Running ExpensesYESYESYES
Occupancy ExpensesYESNONO
How do you use your home office?

As a rule of thumb, if you’re operating a home business from a dedicated area of the house, you will be able to claim both types of expenses. If you’re an employee who does some work from home for convenience, you’ll be allowed to claim running expenses but not occupancy costs.

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

4. Don’t Get Caught Doing Silly Things.

The ATO is cracking down on “ambitious” claims in 2022, so make sure your tax return aligns with reality.

The obvious temptation is to claim occupancy costs even if you’re simply working 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.

Specifically, the area needs to have the “character of a place of business.” Yes, there is some grey area, between that and a “Dedicated Room Used As an Office”, but most employees will fall in the latter category, not the former.

5. Use The Best Claim Method For You.

You can claim a deduction for your home office using one of 3 methods. Each method has specific pros, cons and eligibility criteria.

The simplest methods require the least of your time but yield the lowest tax deductions. More sophisticated methods are great for squeezing every last bit out of your claim but require you to keep extensive records.

We will demonstrate the effectiveness of each method in a hypothetical real-life example, where Tom works from home, in a dedicated room, for 20 hours per week. He spends the other 20 hours of his workweek in Sydney’s PwC headquarters.

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:

  • $3000 laptop purchased for work use
  • $2000 standing desk purchased for work use
  • $1500 ergonomic chair purchased for work use
  • 70% of his $1600 annual phone costs are work-related
  • 50% of his $1200 annual internet costs are work-related.

1. The Shortcut Method.

The shortcut method is temporary (introduced by the ATO in response to COVID-19) and will end on 30 June 2022.

It’s a quick and easy way to calculate your deductions for work-related expenses if you work from home.

You can use the shortcut method to calculate your deductions:

  • between March 2020 and June 2020, for the 2019-20 income year; and
  • for the 2020-21 and 2021-22 income years.

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

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

Pros.

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

You simply have 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 is that it doesn’t always give you the biggest tax return.

It’s also not suitable for calculating occupancy costs.

If you think you may be entitled to claiming those, or you have a lot of running costs to claim, use the fixed-rate method or the actual cost method (see below).

How Much Will You Get?

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

DescriptionTotal
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.

2. 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.

First, you claim 52 cents for each hour you work from home to cover all the increased running costs you have incurred, including extra power, lighting, cooling, heating, and cleaning costs. The decline in value of home office furniture, such as a standing desk or an ergonomic chair, is also included in the rate.

Second, you add deductions for the work-related portion of your home office, including internet bills, phone bills, consumables and the decline in value of computer equipment and accessories, such as your laptop, phone, monitor and headset.

To use the fixed-rate method, you must:

  • incur additional running expenses as a result of working from home
  • have a dedicated work area in your home that is used only for work purposes.

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 desk, office chair, 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.

DescriptionTotal
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:

  • Aren’t required to work from home by your employer – for example, you choose to work from home
  • Have already claimed deductions for working from home expenses using another method.

Learn more about the fixed rate method here.

3. 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:

  • The decline in value of home office furniture (e.g. desks and chairs).
  • Depreciation of computer equipment (e.g. laptop, phone, headset).
  • Heating, cooling and lighting (e.g. a proportion of your total household bills based on the number of hours you work from home compared to the number of hours you use the premises).

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.

Another benefit of the actual cost method is that it allows you to precisely claim your occupancy expenses (e.g. a proportion of your mortgage interest or rent, property insurance, and rates as business expenses).

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:

  • Utilities (electricity, gas, water)
  • Phone and internet
  • Cleaning and maintenance
  • Depreciation of office furniture and equipment

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:

DescriptionTotal
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.

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:

  • Has a commercial use if it is clearly identifiable as such; for example, you have a sign with your business name in front of your home
  • Not readily suitable or adaptable for private or domestic purposes
  • Used exclusively or almost exclusively for carrying on your business
  • Used regularly for visits by your clients

Pro Tip: remember that opting to claim mortgage interest will probably trigger a payment of capital gains tax on the floor area of your house designated as a workspace, when you sell the house.

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:

  • Repairs to a home office
  • Renovations to create or convert a room into a home office
  • Refreshments such as coffee, tea and milk
  • Costs related to your children and their education
  • Home gym equipment

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.

RecordShortcutFixedActual
Itemised phone accountsNOYESYES
Records of internet costsNOYESYES
Records of cleaning costsNO
Diary entries that show hours worked*YESYESYES

*If your work patterns are stable across the year, you can keep a detailed diary for a four-week representative period and extrapolate it to the length of time that your claim covers. If your work patterns fluctuate, you’ll need to keep a diary for the entire year.

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:

“If you’d said three months ago that 90% of our employees will be working from home and the employer would be functioning fine, I’d say that is a test I’m not prepared to take because the downside of being wrong on that is massive.”

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 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.

How much time do Aussies spend commuting?

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.

EmployeesEmployers
BenefitsNo commute
Reach global labour markets
Tax deductions on home office
Cost savings
Reach global talent
ChallengesWorking too much
Lack of community
Bullying
Building trust
Remote collaboration
Major benefits and challenges of working from home for employers and employees.

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.

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