Work-Related Deductions: Working From Home Expenses

From 1 July 2022 - that is, for the 2023 financial year - the ATO have made changes to the fixed rate method of calculating a deduction for work-related working from home expenses. This update is referred to as the 'Revised fixed rate method.'

Importantly, the previous fixed rate method (of 52 cents per hour worked) is no longer available.

Before I jump into all the details, I want to note that these changes are not legislative changes, but an update in the way the ATO have interpreted the legislation, as explained in their Practical Compliance Guideline PCG 2023/1. Importantly, buried in the detail of that guideline, the ATO note that they will not allow you to use this method if you lodge an objection with them in relation to your working from home expenses, so taxpayer beware.

What are the changes?

On to the detail, these changes have:

  • Increased the rate per work hour that you can claim while working from home (from 52 cents per hour to 67 cents per hour);
  • Changed the expenses that are covered in that amount;
  • Change the record keeping requirements; and
  • Removed the requirement to have a home office set aside for work.

In order to use the Revised fixed rate method, you must:

  • Incur additional running expenses as a result of working from home;
  • Have a record of the total number of hours you have worked from home and the expenses you incurred while working at home; and
  • Have records for expenses the fixed rate per work hour doesn't cover and that show the work-related portion of those expenses.

The Revised fixed rate method allows you to claim 67 cents per hour for each hour that you work from home, and includes your deduction for:

  • Home and mobile internet or data expenses;
  • Mobile and home phone usage expenses;
  • Electricity and gas (energy expenses) for heating, cooling and lighting; and
  • Stationery and computer consumables, such as printer ink and paper.

If you are using this method, you cannot claim an additional separate deduction for the above expenses (for example, you cannot also claim a deduction for work-related use of your mobile phone if you are using this method, even if you are using your mobile phone while not working from home).

The Revised fixed rate method does not include work-related use of technology and office furniture (such as computers, desks and chairs), as well as the repairs and maintenance of these items. If you use the Revised fixed rate method, you can separately claim a deduction for these expenses (either immediately if the item costs less than $300, or the decline in value for assets costing more than $300).

From 1 March 2023 onwards, in order to claim the deduction, you need to have a record of the total number of actual hours worked from home. For the period from 1 July 2022 to 28 February 2023 you are required to have a representative record of the total number of hours worked at home (so you can reply on your agreement with your employer, or other documentation).

What does this mean for your tax return?

The ATO have done some interesting things with this change.

Firstly, they have removed the choice that was available when claiming a deduction for the cost of working from home during COVID-19 (that is, the choice between the 'Fixed rate method' of 52 cents per work hour and the 'Shortcut method' of 80 cents per work hour). If you would like to claim a deduction for work-from home expenses, you now have the choice of the 'Revised fixed rate method' or no deduction at all.

Secondly, by changing what is included in this deduction (and what has been excluded), the dynamics of claiming a working from home deduction have changed dramatically.

Thirdly, they have materially increased the substantiation requirement to claim a deduction. Whereas a representative record of the total hours worked has been sufficient, from 1 March 2023, a record of the total number of actual hours worked from home is required. This means at the very least, contemporaneous diary records showing hours worked from home, rather than relying on an agreement with your employer that you are working particular days and times from home.

When the Shortcut rate was announced during the COVID lockdowns, we thought the higher hourly rate would yield a larger deduction for most of our clients. When we started preparing tax returns though, we found that most clients were still better off (that is, had a larger deduction) when they used the lower rate, and also deducted the work-related use of the mobile phones and other expenses that were included in the Shortcut rate deduction.

With the removal of the choice to calculate your deduction, I can see that quite a few of our clients will have to forgo a deduction for working from home expenses, to continue to deduct other expenses that would have been lost in claiming the Revised fixed rate deduction. For example, an employee that has a personal mobile phone plan of $100 per month and 75% of the use of their phone is work-related would no longer be entitled to a $900 deduction ($100 per month x 12 months x 75% work-use) if they decided to claim working from home expenses using the Revised fixed rate method.

As with most tax changes (either legislative or administrative such as this one), it will now require more time and detailed attention to prepare an individual income tax return to ensure that it results in the best outcome for the client, while meeting the legaslative requirements, as well as the expectations of the ATO.

In summary, I see this change as only one in a number of the steps the ATO are taking to reduce deductions that are available to individual taxpayers, both by increasing the record keeping requirements, and by simply reducing what you can deduct.

I also anticipate that we will see an increase in compliance activity (that is, audits and reviews) for clients that claim working from home expenses.

My final takeaway from these changes is to reinforce that you really should be keeping records to support any deductions that you include in your income tax return. The tax act (Income Tax Assessment Act 1997 to be precise) includes a whole division on an individual taxpayer's requirements to maintain records in order to claim a tax deduction. While you don't have to produce documentation to claim a deduction, if the ATO ever ask for it, you'd better have it nice and handy. It is also worth pointing out that the ATO require that you keep receipts for your expenditure. Providing bank statements will not satisfy your obligation under the legislation, and if that is all you have, your deduction will be denied. Also, under these guidelines, you are expected to keep at least one record of each of the additional running expenses you incur that the rate per work hour includes. For example, you must keep at least one electricity bill, one phone bill, one internet bill and one receipt for stationery or a computer consumable.

If you have questions about your work-related deductions, please contact the team at Cake Accounting.