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Decoding the tax implications of working from home vs operating a home office

Working from home as an employee and working from home as an individual fall under different tax rules. It doesn’t matter if you’re working off the dining table or have a dedicated home office, no matter where in the house you work, the deductions remain the same.
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With people either heading back to work in an office full time or moving to a hybrid work model, the Australian Taxation Office has removed the shortcut method for work from home deductibles. In its place a new fixed rate system will go into effect as of the end of the 2023 financial year. Well organised people may also use an actual cost system that allows them to claim deductions with receipts and proof of working hours.

Confused? Given the fact that some of the changes and the requirements for taking advantage of these changes came in part way through the financial year, we don’t blame you. Here’s something else you need to get your head around. Working from home as an employee and working from home as an individual fall under different tax rules.

When you work from home as an employee of another company, the tax department considers you to be doing just that – working from home. It doesn’t matter if you’re working off the dining table or have a dedicated home office, no matter where in the house you work, the deductions remain the same. When you have a home office and work for yourself, you are considered a sole trader, and what and how you can claim against tax is vastly different.

PAYG vs Voluntary Payments 

One of the major differences between working from home and running a home office as an independent contractor is how tax is calculated. When you work for an employer, tax is automatically taken from your pay in a Pay as You Go (PAYG) scheme. Any deductions that you claim at tax time essentially reduce the amount of money you earned, thereby reducing the amount you owed as tax. The difference between the amount taken and the amount with deductables becomes the tax return.

The self-employed and sole traders are responsible for calculating the amount of tax they owe and voluntarily paying it each quarter. Sole traders may be sent an estimate of how much they owe, but as this amount is based on previous earnings it may not be remotely accurate depending on how much or little was earned in that quarter. Come tax time, sole traders must calculate their full earnings for the year and their taxes owed. This may result in a return or a bill for outstanding tax.

Working From Home 

Any employee of an organisation that spends part or even all their work week working from their home rather than an office can claim tax deductions for working from home. From the 2022-2023 tax year onwards, employees working from home can claim either a fixed rate of 67c per hour spent working from home or can calculate their deduction based on saved expenses and receipts.

Fixed Rate Deduction 

The fixed rate is the simplest way of calculating a work from home tax deduction. The 67c per hour fixed rate is intended to cover electricity, phone, internet and consumables such as stationery. Choosing the fixed rate method means that no additional expenses that are covered by the flat rate can be claimed.  

There are, however, additional expenses that fall outside of the fixed rate that can be claimed in addition to the 67c per hour. These additional deductions include the depreciation of assets required for working from home, such as computers and office furniture, the repair of assets and any costs that may be associated with cleaning a home office.

While you may be able to claim cleaning for a home office, this requires proof of an area set aside for working from home. Using the fixed rate deduction does not require a person to prove they have a home office. 

Actual Cost Deduction 

One of the drawbacks of the fixed rate deduction is that it doesn’t consider any fluctuations in expenses so may deliver less of a deduction than individually calculated expenses. If you have the receipts and paperwork, anyone can claim their actual running expenses.  

To claim working from home expenses manually a person must have all relevant receipts and other documents that prove that the expense has been incurred, a thorough record of how many hours have been worked from home, and a record of how the percentage of expenses related to work has been calculated.

Home Office (Independent Contractor)  

If a person works from home as an independent contractor, such as a freelance writer or graphic designer, they will typically be registered as a Sole Trader for tax purposes.  While being a sole trader is the most common form of independent trader for tax purposes, individuals can still be considered independent contractors when registered as a partnership for tax, or even as a company. 

Depending on the nature of work a sole trader performs, they may be able to claim more home office deductions than someone who simply works from home a few days each week. These deductions are known as Occupancy and Running Expenses.

Occupancy Expenses  

Occupancy expenses are any expenses related to what you pay to occupy your home. This can be rent, mortgage interest, land tax, council rates and the like. Occupancy expenses are not available to people working from home, even if they are working from home full time. 

Eligible independent contractors can claim the part of their home that is set aside as a place of business. Occupancy expenses are typically calculated using the percentage of the floor area that the home office or business area occupies.

Running Expenses 

If a sole trader is eligible for Occupancy expenses, they are also eligible for Running expenses. These are expenses associated with running the business from home. They include electricity for heating, cooling, lighting and the operation of machinery or technology, Internet expenses, phone bills, equipment costs and even cleaning expenses. Running expenses also include the depreciation or repair of necessary equipment, furniture (chairs, desks, etc) and furnishings (light fittings, carpet, blinds, etc). 
Running expenses may be calculated by working out the percentage of any expense that is dedicated solely to business use. People using this method must have records to show how the expenses were calculated. Running expenses may also be calculated using the same fixed rate method that can be used by people working from home – a flat 67c per hour worked from home to cover all expenses bar depreciation and repairs.

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