Running a home-based business offers numerous advantages, including the potential for significant tax deductions. Understanding what you can claim and how to calculate your deductions is crucial for maximising your tax benefits. This guide will walk you through the key aspects of claiming deductions for your home-based business in Australia, with updated information for tax time.
Eligibility for Working from Home Deductions
To be eligible to claim a deduction for working from home expenses, you must:
- Be working from home to undertake your employment or business duties, not just completing minimal tasks
- Incur additional running expenses as a result of working from home
- Have records to show you incurred these expenses and the hours that you worked from home during the income year
It’s important to note that as an employee working from home, you generally can’t claim occupancy expenses like rent, insurance, or mortgage interest. However, if you run a business from home, you may be able to deduct a portion of these expenses, which can significantly impact your overall tax liability.
Types of Deductible Expenses
Home-based businesses can generally claim deductions in three main categories:
- Running expenses
- Occupancy expenses (for business owners, not employees)
- Motor vehicle expenses
Let’s explore the running expenses in detail, as these are most relevant for employees working from home.
Running Expenses
Running expenses are the increased costs of using your home’s facilities for business activities. These can be claimed even if your home doesn’t have the character of a ‘place of business’.
Common running expenses include:
- Electricity and gas charges for heating, cooling, and lighting
- Internet and phone expenses
- Cleaning costs (if you have a dedicated home office)
- Stationery and computer consumables
- Depreciation of equipment, furniture, and furnishings used for work
Remember, you can only claim the portion of these expenses that relate to your business use.
Methods for Calculating Deductions
There are two methods you can use to calculate your working from home deductions: the fixed rate method and the actual cost method.
1. Fixed Rate Method
The fixed rate method allows you to claim a set rate per hour you work from home. This method covers expenses that are often difficult to apportion, including:
- Data and internet
- Mobile and home phone usage
- Electricity and gas
- Computer consumables (e.g., printer ink)
- Stationery
You don’t need a dedicated home office to use this method. However, you can’t claim a separate deduction for any of the expenses the fixed rate includes.
You can claim a separate deduction for:
- The decline in value of assets used while working from home, such as computers and office furniture
- The repairs and maintenance of these assets
- Cleaning (if you have a dedicated home office)
2. Actual Cost Method
The actual cost method allows you to claim a deduction for the actual expenses you incur as a result of working from home. This may include:
- Data and internet
- Mobile and home phone usage
- Electricity and gas
- Computer consumables
- Stationery
- The decline in value of assets used while working from home
- Cleaning (if you have a dedicated home office)
This method requires detailed calculations and records. For example, you will need to know and have records of the cost per unit of electricity and average units used per hour.
Record Keeping Requirements
Proper record-keeping is crucial for claiming working from home deductions. Here’s a checklist of records you need to keep:
For Both Methods:
- Records for any depreciating assets you claim, including:
- When and where you bought the item and its cost
- When you started using the item for work-related purposes
- How you calculate your percentage of work-related use
- The method you chose to work out the decline in value
For the Fixed Rate Method:
- A record of all the hours you work from home for the entire year (e.g., timesheets, rosters, or a diary)
- Evidence you paid for the expenses covered by the fixed rate method (e.g., one bill each for phone and electricity)
For the Actual Cost Method:
- A record that represents the hours you work from home (e.g., timesheets, rosters, or diary showing at least a 4-week regular pattern of work)
- Evidence for every expense you claim, including receipts, bills, or invoices which show the supplier, amount of the expense, nature of the goods, date it was paid, and date of the document
- Evidence of your personal and work-related use of the items or services you buy and use
Note: In most cases, a bank or credit card statement alone isn’t enough evidence of a work-related expense.
Final thoughts
Claiming deductions for your home-based business or work-from-home arrangement can significantly reduce your tax liability, but it’s essential to understand the rules and keep accurate records. Always consult with a tax professional to ensure you’re claiming correctly and maximising your deductions within the bounds of the law.
Remember, the key to successful tax management for your home-based work is meticulous record-keeping and a clear understanding of what constitutes business use versus personal use of your home resources. The myDeductions tool in the ATO app can be a helpful resource for keeping track of your expenses and receipts throughout the year.
For more detailed information, visit ato.gov.au/home or book in a chat with Amanda.