How To Maximise Your Working-from-home Deductions

Do you have a home-based job? If this is the case, are you aware of the tax deductions that you would be eligible for if you deducted the supplies and equipment that you use at your home office for the purposes of your work?

It's possible that you were unaware that a "home office" is defined as a space in your home that has been organised specifically so that you may carry out work-related responsibilities in an atmosphere that is conducive to concentration and productivity. There are tax savings available when it comes time to sell or buy property, in addition to the fact that you are eligible to write off specific assets such as computer systems, software subscriptions, and other technology expenses related to your work from home arrangement.

Working from home is a terrific way to cut costs, but it also comes with its share of challenges. First things first, you need to ensure that you are putting in the effort and earning a sufficient amount to at least cover the expense of your internet connection.

Working from home in Australia entitles you to a number of particular tax deductions, some of which you probably aren't aware of. If you are self-employed or run a small business out of your home office, the information contained in this blog post may be of assistance to you in calculating the additional income tax relief to which you are entitled as a result of your employment status.

Working from home because of Covid-19, among other reasons

Are you one of the many people in Australia who, despite the COVID-19 pandemic, chose to work from the comfort of their own homes? If the answer is yes, you may be able to claim deductions for working from home on your tax return for 2020 and 2021. The added benefit is that you may be able to keep more of your hard-earned money after accounting for taxes.

However, before you go ahead and compute your deductions for working from home, it is vital to be aware of certain recent modifications that have been made by the ATO. These changes might have an effect on the total amount that you are able to claim.

The expenses you incur while working from home can now be computed with the help of an updated technique.

Which Approach Suits You the Best?

The Australian Taxation Office (ATO) just recently revealed a new technique that would make it simpler for individuals who are new to working from home to file a claim for tax deductions.

This new method, which has been dubbed the "shortcut method," enables you to claim 80 cents per hour for each hour worked from home beginning on March 1, 2020 and continuing through June 30, 2020 (income year 2019/20) and beginning on July 1, 2020 and continuing through June 30, 2021 (income year 2020/21).

Let's take a look at both the new "shortcut approach" and the previous "operating expenses" method so that we may determine which one is more applicable to your situation. If you choose the incorrect technique, you run the risk of shortchanging yourself on your tax return by a significant amount of money depending on the specifics of your situation.

Running Costs: Using the Current Fixed Rate Method

When you work from home, you are eligible to receive 52 cents per hour. In addition, you are able to make a separate claim for the proportion of your phone, internet, and computer depreciation costs that is attributable to your employment.

The "Shortcut" Approach: The Alternative

In a manner comparable to that of operating expenses, according to this approach (which will only be accessible until March 2020), you will be able to claim 80 cents per hour. However, and this is a crucial point, it encompasses everything! Other expenses related to working from home, such as those for the phone, internet, stationery, or the depreciation of furniture or equipment, cannot be claimed individually. This "80 cents" option is being promoted by the ATO, however the majority of people will receive a lower tax refund if they make a claim of this kind.

The other method that currently exists is known as the "Occupancy Expenses" Method

Only the "running expenses fixed rate" method and the new "shortcut" method are compared in this piece so as to keep things as straightforward as possible. There is however a third, more involved approach to claiming expenditures incurred when working from home that is available. This approach is only accessible to you if you work from home full-time and continuously, which means that it is not relevant for the COVID-19 application.

Let's have a look at the difference between the Running Expenses Fixed Rate and the Shortcut Method

Exhibit A: The "Shortcut Method" Revised and Improved

Oliver is a recruiting consultant who now works his full-time schedule from the comfort of his own home rather than reporting to the office. Even though the employer provides him with a laptop and a mobile phone, he still uses the internet in his own house, which he shares with his wife. He estimates that his use of the internet is 55% related to work.

Expenses While Running (the Currently Used Method):

Oliver is eligible to get $332.80 if he works 40 hours per week, times 52 cents, for a total of 16 weeks (March–June).

Oliver's Internet service costs $80 a month, which he and his wife split evenly between them as payment.

As a result, Oliver's portion of the internet cost is $40, and he is eligible to receive 55% of that amount for a period of four months, which comes to $88.

Since Oliver's computer and phone are both provided by the employer, he is unable to claim either of those goods on his tax return because he is not directly responsible for paying for them.

In total, Oliver's work-from-home claim for the months of March through June amounted to $420.80.

The expedited approach, also known as the new way:

It's possible for Oliver to collect $512 if he works 40 hours a week at 80 cents per hour for 16 weeks.

Oliver is unable to make a claim for his internet because the tariff of 80 cents per hour already includes it.

If Oliver used the new Shortcut technique to calculate his work-from-home deduction, it would result in a $91.20 increase to the total amount claimed.

Example 2: The Fixed Rate Method for Operating Expenses Is Preferred

Evie is a town planner who currently works her full-time schedule of 38 hours per week from her home rather than in an office setting. She keeps a log of the time she spends on her work-related mobile phone and internet use during the month of May and determines that 55% of the time she spends on her mobile phone is linked to work, while 50% of the time she spends online is related to work. Let's contrast these two approaches to dealing with Evie:

The current 52c approach for calculating running expenses is as follows:

Evie is eligible to get reimbursement in the amount of $316.16 for her time and labour based on the following formula:

55% of her monthly phone cost, which is $99, multiplied by 4 months is $217.80 that she is eligible to claim.

Evie can deduct a total of $160, which is equal to 50% of her $80 monthly internet payment multiplied by 4 months.

For the months of March through June, Evie was paid a total of $693.96 for her labour from home.

The shortcut method, sometimes known as the new 80-cent method:

Evie can make a claim for $486.40 if she works 38 hours per week at 80 cents per hour for 16 weeks.

Since the phone and internet are already included in the cost of 80 cents per hour, Evie has no right to make a claim for them.

Since this is the case, Evie's claim for a deduction related to her work from home would be significantly increased by $207.56 if she claimed the existing Running Expenses rate of 52 cents per hour in addition to her phone and internet separately.

Which Approach Suits Me Best?

As you can see from the examples provided above, it all comes down to which costs associated with working from home are covered by your employer and which ones you are responsible for paying on your own. The new 80c technique could work for you if you are in a situation where your employer covers all of your expenses; nevertheless, the original Running Expenses method provides a greater tax refund for the majority of people who pay for their own expenses out of their own pockets.

It is crucial to keep in mind that the rules governing the standard deduction apply to any deduction you claim on your tax return:

• You must have come up with the money to cover the expense all on your own
• It ought to have a clear connection to the work that you do, and
• It is impossible that you have already been compensated for the expense.

Common Errors People Make When Claiming Expenses for Working from Home

Forgetting to apportion shared bills: People often make the mistake of claiming the whole amount of their monthly payment, even though the expense of that bill is split among multiple people. For instance, if you live in a house that is shared with two other people and decide to divide the monthly internet payment of $120 that each person is responsible for, your portion of the bill will be $40 per month. Not the full 120 dollars, but that number is what you use to calculate your reimbursement.

Not understanding how depreciation rules work: If you buy something connected to your job that costs more than $300, such as a laptop, you won't be able to deduct the full amount when you file your taxes the following year. Instead, it is claimed over the amount of time that the ATO considers to be the item's working life. Because the "working life" of the various assets that you purchase, such as desks, computers, printers, etc., might vary greatly, it is imperative that you discuss this matter with your accountant.

Claiming home office expenses when you don’t have a dedicated room or office in your home: Although this condition for the "Shortcut Method" has been modified by the ATO, in order to claim any home office costs incurred before to March 2020, you are need to have a space or office in your house that is specifically designated as an office. It does not count if you are sitting on the couch or the kitchen table.

Tax advice: How to maximise your deductions for working from home

This column, like with pretty much every other one I've written so far during this fiscal year, is brought to you straight from the dining room table, despite the fact that my superiors have been trying to get me to come back to the office.

My left leg is dangerously close to an oil column heater that is turned all the way up, and I'm wearing a beautiful blue polar fleece and ugg boots. To complete the picture, let me describe what I'm wearing.

Because of the COVID-19 pandemic that has been sweeping Australia over the past year, millions of people have found themselves in the unanticipated position of working from home. However, because many people no longer need to pay for transportation, bought lunches, or additional attire, this has resulted in huge cost savings for a number of people.

On the other hand, working from home has resulted in higher expenditures for things like internet usage, utility bills, and the purchase of home office equipment, furniture, and stationery. If this is your situation, it is time to start thinking about the possible deductions you are qualified to make on your yearly tax return.

During the most recent fiscal year, 4.4 million Australians claimed a deduction for working from home, which is an increase from the 3.1 million who did so during the previous year.

There are three possible approaches to determining the value of your claim. This week, in an effort to determine which option is superior, I contacted the assistant commissioner of the Australian Taxation Office (ATO), Tim Loh, as well as the tax specialist at the accountancy firm H&R Block, Mark Chapman.

Both parties agree that the so-called "shortcut approach" – which was adopted by the Tax Office the previous year in response to COVID-19 – is the easiest method by a wide margin.

In a nutshell, you have the ability to claim a deduction in the amount of 80 cents for each hour that you worked from home during the course of the year, regardless of the real expenditures that you incurred.

According to Loh, one in four people utilised this procedure for the purpose of computing their work-from-home deduction during the previous fiscal year. "It's a simple approach that people can utilise without having to rummage through a shoebox full of receipts in order to claim their deductions, which we believe is a plus." We anticipate a significant increase in the number of users this year."

You only need to be able to submit a timesheet, roster, or diary to demonstrate the amount of hours that you actually worked from home in order to employ the shortcut technique. There is still a sliver of time left before the end of the fiscal year for you to cram in keeping a diary that covers a period of four weeks to document your work hours. That should be sufficient, according to Loh, provided that your work schedule has not significantly shifted throughout the course of the year.

Under the 80-cents-per-hour shortcut technique, you will be eligible for a deduction of around $1,500 if you worked full time from home for 40 hours per week, for 48 weeks of the year. This equates to full-time employment.

Nevertheless, Chapman from H&R Block issues the following caution: "The shortcut method is straightforward to apply; however, the problem is that it does not always yield the best return."

The majority of H&R Block clients, however, employ a different tactic, which is referred to as the "52 cent method."

You have the ability to make a claim for 52 cents for every hour that you work from home to cover any increased operating costs that you have incurred as a result of working from home. These costs may include additional lighting, cooling, or heating; power to run your computer; costs associated with cleaning; and a decline in the value of your furnishings.

Then, you add on top deductions for the work-related portion of your internet bills, phone bills, office consumables such as ink cartridges and stationery, and the decline in value of equipment and devices such as phones, computers, laptops, headphones, and monitors. Finally, you add on top deductions for the decline in value of equipment and devices such as phones, computers, laptops, headphones, and monitors.

Using the rate of 52 cents per hour and not claiming any of the above-mentioned items would result in a deduction of $998 for the worker who followed Loh's example. That is $538 less than the short-cut route, thus the issue that needs to be asked is: can that worker find $538 or higher in costs to claim on top of the 52 cent rate?

If you paid a significant amount for work-related phone bills or internet expenses, or if you purchased costly equipment such as laptops, you might come out ahead financially by utilising this strategy.

Items costing less than $300 can have their entire purchase price deducted from their taxes in the year they are acquired. However, in order to properly account for their cost, goods that cost more than $300 need to be depreciated over their lifetime, and this must begin on the first day that they are utilised. If you buy a laptop tomorrow that costs $2,000, for example, you won't be able to deduct the full $2,000 on your taxes for this fiscal year. Since the average lifespan of a laptop is around two years, the most you may claim annually is $1,000. And if you only used it for three weeks out of the year, you could only claim a small fraction of that total price as a deduction.

Those of you who are fans of the 52 cent piece should also be aware that the ATO is cracking down this year on those who claim an excessive amount of their personal internet bill as being related to work-related expenses.

Because it is obvious that a lot of Australians spent the previous year sitting around watching Netflix on their couches, it is vitally important to make sure that you only claim the portion of your internet expenses that is relevant to your place of employment.

If your internet bill is, for example, $100 per month and therefore $1200 per year, "if you've been watching Netflix most of the time, we expect the deduction to be closer to zero than $1200," warns Loh.

When there are numerous persons in a household working from home, you need to be sure to divide up the resources appropriately so that everyone gets their fair share. It's possible for things to grow confusing.

Loh cautions that in addition to having a "dedicated workplace" in your home, one is need to employ the 52 cent approach. It is not necessary for there to be a separate space for this, but my dining table is not considered part of this.

"It must be a location that is reserved exclusively for business-related activities." It can't be the living room since there's a TV there, and someone else is watching Netflix. " If you don't have a designated area to work in like I have, the shortcut technique is your only real alternative.

When it comes to purchasing devices, Loh also cautions against combining personal and professional needs in the same transaction.

If you have high-end headphones, you probably won't use them for work the majority of the time. Instead, you'll want to use them for entertainment as well, which means you can't deduct the full cost of the headphones from your taxes. Therefore, it is essential that it be rational.

People who have already invested money into outfitting a specific space in their home for use as a work-from-home office may want to investigate the ATO's third option, known as the "real method." Unfortunately, this one is challenging and requires careful record-keeping in order to determine the true expenses of usage for everything, including power, lighting, and heating.

According to Loh, it is "quite an intense procedure," and Chapman warns that it comes with "potentially onerous substantiation requirements." Therefore, if you are interested in this strategy, it may be something that you should discuss with a tax professional.