Working from home — the tax implications

Advances in technology, family-friendly policies and flexible working arrangements have made working from home – whether as an employee or self-employed person – an increasingly attractive and practical option for many people. However, there are some expenses associated with earning an income from home.

In general terms, the Tax Office takes the view that expenditure associated with a person’s place of residence is more likely to be of a private nature. However, if you produce assessable income at home, or some of it, and you incur expenses from using that home as your “office” or “workshop”, you will generally be in a position to be able to claim some expenses and make some deductions.

Deductions may be available from the use of your home to earn income in two circumstances.

  1. If it is used in connection with your income earning activities but isn’t a place of business (that is, your home is not your principal place of business, but you might do a few hours of work there).
  2. The home is also being used as a place of business.

The tax implications are different depending on which of these circumstances applies.

In broad terms, expenses fall into the following categories.

Depreciation

There are deductions available for a “decline in value” (depreciation) of items such as electrical tools, desks, computers and other electronic devices.

  • If you use your depreciating asset solely for business purposes, you can claim a full deduction for the decline in value, generally over its “effective life”. However, remember that if you qualify as a “small business entity” (less than $2 million a year turnover) you could immediately write off most depreciating assets – after the Budget announcement this write off has increased to $20,000 (pending becoming law). You may also be able to pool most other depreciating assets and claim a deduction for them at a rate of 15% in the first year and 30% thereafter.
  • If you also use the depreciating asset for non-business purposes, you must reduce the deduction for depreciation by an amount that reflects this non-business use.

Running expenses

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

There are several ways to work out your running expenses. Speak with us to determine which method will suit you best.

  • Your floor area. For example, if the floor area of your home office or workshop is 10% of the total area of your home, you can claim 10% of heating costs.
  • Compare before and after average usage costs.
  • Keep a representative four-week diary to work out a pattern of use for your home work area.
  • Instead of recording actual expenses for energy costs (heating, cooling or lighting) it may be easier to use the acceptable Tax Office rates for these expenses of 45 cents per hour based on actual use or an established pattern of use. To use this method, keep a diary for at least four weeks to record the amount of time you use your home office for work purposes.

Telephone

  • If you use a phone exclusively for business, you can claim a deduction for the phone rental and calls, but not the cost of installing the phone.
  • If you use a phone for both business and private calls, you can claim a deduction for business calls (including from mobile phones) and part of the rental costs.
  • You can identify business calls from an itemised phone account. If you do not have an itemised account, you can keep a record for a representative four-week period to work out a pattern of business calls for the entire year.

Deductions for occupancy

Occupancy expenses can only be claimed if you are using your home as a place of business, not just conveniently working from home as a salaried employee.  This means that the Tax Office expects you to have an area of your home set aside exclusively for business purposes. Occupancy expenses are those expenses you pay to own, rent or use your home. These include:

  • rent, or mortgage interest
  • council rates
  • land taxes
  • house insurance premiums.

You can generally claim the same percentage of occupancy expenses as the percentage area of your home that is used to make income. In some situations it may be necessary to adopt a basis other than floor area, for example where a huge workshop attached to the home may take up a great amount of floor space but contribute much less to the value of the overall property.

Note however, you may be expected to account for any capital gain attributable to the business area of the home when you sell the house. Generally the family home is exempt from capital gains tax (CGT), but if you’ve carried on a business, that portion of the home attributable to the business activity may be subject to CGT. There are however some CGT concessions for small businesses, which we can detail for you should this be relevant to your situation.