5 tips to get home office deductions right

Your client might be sick of the daily commute, or want more flexibility of hours – or it could be that they have a talent or skill that they trust will translate into a fulfilling career in their own business. Or it could just be that the idea of working from home seems to offer a better work/life balance.

And for your client wanting to have their cake and eat it too, there just may be icing for that cake in the form of tax advantages.

Indeed Australian Bureau of Statistics (ABS) reports indicate that home-based work is prevalent in the Australian community. The 2006 Census showed that 426,523 Australians said they worked from home, and the 2011 survey had 443,939 similarly employed. We can expect to see similar trends in the Census 2016 data.

The deductible expenses that crop up from working at home are generally classified as being:

  • “occupancy” expenses, and
  • “running” expenses

Deductions for occupancy
These relate to expenses for using the home obviously, but not necessarily directly tied to the business itself. These can be rental costs, perhaps mortgage interest if you qualify, council rates or insurance premiums.

To claim a deduction for any occupancy expense, the area you set aside for working needs to have the “character of a place of business”. In other words, “Hilda’s Hair Salon” or “Barry’s Bookkeeping” should have the characteristics of a place that offers whatever product or service that home-based business is involved in.

Taxpayers can generally claim the same percentage of occupancy expenses as the percentage area of their home that is used to make income (for example, if the home office is 10% of the total area of the home, then you can claim 10% rent costs, council rates and so on). However opting to claim occupancy expenses, especially mortgage interest, will mean your client will be expected to account for any capital gain attributable to the business area of the home when the house is sold.

No specific work area
Your client may still make a living from home, but may not have a particular area set aside primarily or exclusively for these income-producing activities. Mabel’s Macrame Magic, for example, could see Mabel making her creations next to the radio one day, on the front porch another day, or at the kitchen table the next while keeping an eye on the stove.

There is no defined area from which a business is conducted, but Mabel can still claim deductions for utility usage such as gas or electricity. She just needs to apportion expenses and be able to show how she reached these amounts. Then there are phone costs for business use, and even the decline on value of “plant and equipment” (chair, desk, computer). She will however be unable to make any claims based on renting or owning the house, and also rates or insurance.

Running expenses
These can generally be viewed as those costs that result from using facilities in the home to help run the business, so these would include electricity, gas, phone bills and perhaps cleaning costs. But again your client can only claim a deduction for the amount of usage from the business, not general household expenses.

Running expenses may be deductible where the taxpayer, who has a home office, can establish that they have incurred additional expenditure on the running expenses as a result of their income producing activities. Essentially, taxpayers can claim a deduction actually incurred through their income earning activities which is additional to their private expenditure.

Taxation ruling TR 93/30 specifically discusses two categories of such expenditures: (i) heating/cooling and lighting expenses, and (ii) decline in value of depreciating assets (ie depreciation).

home-office-claim-categories

Bundled phone and internet plans
It is common for households to subscribe to “bundle” plans. These subscriptions typically give the household access to two or more services (typically phone, internet, and subscription television services) from the same service provider. One periodic (usually monthly) fee is charged for the single bundle.

The bundle fee is always lower than the sum of the fees that the taxpayer would have to pay if they subscribe to each service separately. This is a critical characteristic of a service bundle as it affects the calculation of the amount that is deductible.

It is necessary to appropriately match work related use to particular costs. The ATO suggests that the bundle cost can be separated into different components as follows:

  • an apportionment based on the supplier’s breakdown of the relative cost of the bundled components
  • an apportionment based on the relative costs of the bundled components as if they were purchased separately from the same supplier; or
  • if there is no breakdown available, then an apportionment based on information obtained from a comparable supplier.

The quicker “cents per hour” method
In PS LA 2001/6, the ATO offers taxpayers an administrative concession for calculating running expenses deductions. The deduction can be calculated at the rate of 45 cents per hour. (This rate applies from 2014-15. It was 34 cents per hour from 2010- 11 to 2013-14.)

The taxpayer is still required to keep a record of number of hours worked at home, but they are relieved of the burden of calculating the precise deductible amount for each type of running expenses.

 

 

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