How much tax can you save when working from home?
The chances are, you’ve recently transitioned from a daily commute into a busy office, to a work-from-home arrangement. However, one problem faced by those who are newly home-based is calculating the amount of tax they can save from this new arrangement.
If your main place of work is your home, the good news is that you will qualify for some additional tax claims. But, it’s important to realise that not everything is tax deductible. Here are the details about such claims, to ensure you pay the correct taxes.
If it’s necessary to designate a room or space within your home as your new office or workplace, you may claim running expenses. You can claim for running expenses using three accepted tax methods when running a business, however, it’s best to seek business taxation advice from qualified tax professionals before making any deduction claims. The three methods are:
This method is the easiest of the three for calculating running expenses. The shortcut method allows you to claim 80 cents per hour worked for the expenses incurred, including electricity, internet access, tech consumables, shrinking office equipment value and even your cleaning bill.
To claim using the shortcut method, you need to keep sufficient records of your hours that required work at home due to COVID-19. These should be listed in your tax return in this way: ‘COVID hourly rate’. If you opt for this expense type, it’s important to note that you’re not allowed to make additional claims for any expenses already covered.
2. Fixed Rate
Using the fixed rate method, there are three main claim categories in which to list your work-from-home expenses. These are:
- Claiming 52 cents for every hour of work – This applies to your cooling and heating costs, cost of electricity, as well as the decreasing value of home office or workplace furniture.
- Claiming for work-related portions of certain expenses – This applies to things such as office stationery, computer or tech consumables, internet expenses and phone bills, among others.
- Claiming for work-related portions of decline in equipment value – This applies to equipment such as your laptop or desktop computer, and other business machines used in your work.
To apply the fixed rate style, it’s necessary to have an accurate record of the time spent working at home. This means using some kind of record-keeping tool such as a business diary or a timesheet, to cover a duration of four weeks. The idea is to demonstrate the usual work schedule that you are rendering services for as a home-based worker.
3. Actual Cost
Among the three methods, this one is perceived as the most precise. It’s also the most tedious as it requires you to provide proof of every work-from-home business expense. You can’t include any items that your employer has already paid for as part of your job.
To comply with this method, you must:
- Present proof of actual hours worked
- Ascertain the total electricity used to run your home office. If your workspace isn’t in a designated office, calculate this figure by checking the basic unit rate then multiplying that with your actual work hours per day.
- Present proof of any work-related expenses incurred, including receipts for every expense you paid as part of your work-from-home job. This encompasses assets, consumables, repairs and even cleaning.
Expenses under this category are those related to either renting your current home or outright ownership of the property. These expenses could be some or all of the following:
- Rental costs
- Interest on a mortgage
- Land tax
- Insurance protection for your property
- Rates of the Council (if applicable)
Occupation expenses can’t generally be claimed on tax, unless they fall under the following two exceptions: your workspace at home can’t be used domestically, such as a work shed, or you have not been offered an alternative workspace, so working from home is your only option.
To calculate, use the following equation:
(Overall occupation expenses) x (percentage of the home office floor area used) x (percentage of the 12 months you spent working at home)
Capital Gains Tax Implications on use of Occupation Expenses
If you intend to sell your home eventually but currently use it as a primary workplace, you should inquire with a tax advisor about any potential Capital Gains Tax (CGT) implications. Put simply, when you use your property to generate income, either in part or full, then you’re unable to take full advantage of the CGT Main Residence Exemption for your official workspace at home. This then means that if you come to sell your home you will be required to pay CGT on the portion which you’ve used for your work.
Internet and Phone Expenses
It’s almost a given that working from home means using your internet and phone extensively. Thankfully, you may file a claim for your internet and phone usage, provided you do use them regularly for work. To claim, you’ll require records of your phone and internet access over four consecutive weeks. These four-week records will then be considered the basis for an entire year’s worth of internet and phone expenses.
Filing taxes can be stressful at the best of times, but with many people switching to a work-from-home arrangement, they’re more complicated than ever. Before submitting any deductions, ensure you have detailed records of any work-related expenses incurred and a detailed understanding of what you can claim.