If you operate some or all of your business from home, you may be able to claim tax deductions for the business portion of expenses.

These may include:

  • occupancy expenses (such as mortgage interest or rent, council rates, land taxes, house insurance premiums)
  • running expenses (such as electricity, phone, decline in value of plant and equipment, furniture and furnishing repairs, cleaning)
  • the cost of motor vehicle trips between your home and other locations, if the travel is for business purposes.

You may not be able to claim occupancy expenses if personal services income rules (PSI) apply to your business.

You can claim both occupancy expenses and running expenses if you have an area of your home set aside as a ‘place of business’.

Remember, if your business is entitled to goods and services tax (GST) input tax credits, you must claim the deduction in your income tax return at the GST exclusive amount.

You may be eligible for an immediate deduction or an accelerated rate of decline in value for depreciating assets under one of the tax depreciation incentives, such as temporary full expensing.

There are recent changes in the methods to calculate running expenses.The temporary shortcut method ended on 30 June 2022.

For the 2022–23 income year, you may be able to use the revised fixed rate method to calculate your running expenses – which is a fixed rate of 67 cents per work hour and incorporates the following usage expenses:

  • electricity
  • gas
  • stationery
  • computer consumables, such as printer ink
  • internet

You can’t claim an additional separate deduction for the expenses covered by the rate per work hour.

You can separately claim a deduction for the decline in value of depreciating assets, such as laptops, mobile phones and office furniture. You can also claim a deduction for any other running expenses not covered by the rate, for example, cleaning your home office.

If you don’t use the revised fixed rate method, you can claim the actual expenses you incurred while working from home.

Tax Tip. Regardless of what method you choose to use to calculate your home-based business expenses, you should keep complete and accurate records for at least 5 years to substantiate your claims.

Important Note: Be aware that you may have to pay capital gains tax (CGT) when you sell your home if you used part of your home for business purposes – remember to keep the right records to work out your deductions or CGT. If you are eligible, you may be able to reduce your CGT by applying the small business CGT concessions.

  1. Type of business structures

Your business structure can affect the method you can use and the expenses you can claim, especially if your business is a company or trust.

  1. Home-based business expenses – sole trader or partnerships

How to claim occupancy and running expenses for the business use area of your home as a sole trader or partnership.

You can claim both occupancy expenses and running expenses if you have an area of your home set aside as a ‘place of business’.

Signs that an area of your home has the character of a ‘place of business’ include:

  • clearly identifiable as a place of business, for example, you have a sign identifying your business at the front of your house
  • not readily suitable or adaptable for private or domestic purposes
  • used exclusively or almost exclusively for carrying on your business
  • used regularly for visits by your clients.

For example, a home hair salon business that is in the home but separate from the family living areas and has a dedicated entry for clients.

  1. Occupancy expenses

Occupancy expenses are what you pay to own, rent or use your home.

They include:

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

You can only claim occupancy expenses if the area of your home set aside for your business has the character of a ‘place of business’. If you are eligible to claim occupancy expenses, you will also be able to claim running expenses.

  1. How to calculate occupancy expenses

You would usually calculate occupancy expenses based on the percentage of the floor area of your home that is a place of business and the proportion of the year it was used for business.

In some circumstances, you may not be able to work out the floor area of your home that is used for your business. We will accept an alternative method of working out how much of your home you use for business purposes, if the method you use is reasonable and based on accurate information. Make sure you keep accurate records of how you worked out the occupancy expenses you claim as deductions.

If you’re a sole trader with simple tax affairs, you can use the myDeductions tool in the ATO app to record your expenses.

Example: Claiming occupancy expenses (Sole Trader)

Alex is a sole trader operating an auto electrical business from his home. He uses a workshop attached to his house to carry on his business. Alex installed signage on the workshop doors so that customers can easily identify his business. The workshop is used almost exclusively for his business and has the character of a ‘place of business’.

Alex uses the PSI tool to work out that the PSI rules do not apply to his income.

Therefore, Alex can claim occupancy expenses.

Alex’s workshop covers 10% of the floor area of his home and was used for business during the entire income year, so he can claim deductions for 10% of his occupancy expenses which include:

  • mortgage interest
  • house insurance premiums
  • council rates.

Alex can also claim running expenses.

  1. Running Expenses

Running expenses are the additional costs of using your home for your business activities.

They include:

  • electricity charges for heating, cooling, lighting and to run electronic items used for work
  • gas charges for heating
  • mobile, home telephone and internet expenses
  • stationery and computer consumables
  • cleaning costs
  • the decline in value (depreciation) and cost of repairs of
    • equipment, such as computers, tools and machinery
    • furniture, for example, chairs, desks and bookcases
    • furnishings, such as curtains, carpets, light fittings (you can only claim furnishings if you have a dedicated or separate room)
  1. How to calculate running expenses

To claim a deduction for running expenses, you need to work out the portion of the expense that relates to business use.

There are several ways to work out your running expenses. You can use any method to calculate your running expenses, provided:

  • it’s reasonable in your circumstances
  • you exclude the percentage of costs for your private (normal) living costs
  • you have records to show how you calculated the expense.

Your business use of the home area must be substantial and not incidental. For example, you can’t claim electricity costs 24 hours per day simply because your fax machine is always on to receive business faxes.

If you’re unsure of which method to use, you can calculate your expenses using each of these methods and choose the one that gives you the best result.

Revised fixed rate method

For the 2022–23 income year, the revised fixed rate is 67 cents per hour for each hour you work from home during the year. It covers the total of running expenses for usage of electricity, gas, internet, mobile and home telephone, as well as incidentals such as stationery and computer consumables, for the income year. This means you can’t claim a separate deduction for any of these expenses.

The revised fixed rate method does not require you to have an area of your home set aside exclusively for business. It also allows you to separately claim the business-related portion of depreciating assets and equipment, including their repairs and maintenance costs.

If you choose to use the revised fixed rate method, you need to keep:

  • a record of all hours worked from home for the entire income year (such as timesheets, roster or diary). For the 2022–23 income year only, if you don’t have a record of all your hours for the year, we will accept a representative record of your hours from 1 July 2022 to 28 February 2023, but you will still need a record of the total number of actual hours from 1 March 2023 to 30 June 2023.
  • evidence for each of the running expenses covered by the fixed rate method that you have incurred (for example, if you use your phone and electricity for your home-based business, keep one monthly or quarterly bill for each of these expenses)
  • records of your personal and business-related use of your depreciating asset and other items not covered by the rate.

Example: using the revised fixed rate method as a sole trader

Harper decides to work out how much she can claim using the revised fixed rate method.

Harper keeps:

  • a diary of hours worked from home for a representative 4-week period during the period from 1 July 2022 to 28 February 2023 (it showed that she spent 30 hours a week on her business at home)
  • logs from the computer system she uses for her business when working at home for the period 1 March to 30 June 2023 (it showed that she spent a total of 551 hours working from home).

Harper took 4 weeks holidays over December 2022 and January 2023, which she excludes from her calculation, and works out her deduction as:

  • Period from 1 July 2022 to 28 February 2023 = 34 weeks
  • 34 weeks − 4 weeks holiday = 30 weeks (30 weeks × 30 hours per week) + 551 hours = 1,451 hours
  • 67c per hour × 1,451 hours = $972.17

She can also claim the decline in value of her desk and chair, which is $93.25.

Using the revised fixed rate method and the decline in value, Harper can claim a deduction of $1,065.42 for the 2022–23 income year, provided she has kept all the records required.

Important: FY 2021-2022

If you are claiming for a prior year, the:

  • fixed rate was 52 cents per work hour for the 2021–22 income year – what the rate covers is slightly different
  • all-inclusive temporary shortcut method, which did not allow separate claims for decline in value (depreciation) or any other running expenses, was available from 1 March 2020 to 30 June 2022.

You will need to meet the eligibility and record keeping requirements for the method you choose to use.

Floor area method

You can use the floor area method if you have an area of your home set aside as a ‘place of business’.

The floor area method is often the most appropriate method to work out the business portion of running expenses, including:

  • electricity
  • gas

To work out the percentage of your home that is a place of business, you divide the floor area set aside for business by the total floor area of the home. If that area was only a place of business for part of the year, you can only claim running expenses for the proportion of the year it was used for business.

If the business portion of your running expenses is calculated on anything other than the floor area (for example, on actual electricity use), you need to keep records which show how you worked out the amount you are claiming.

In addition to the floor area method, you can also claim a deduction for decline in value of the business-related portion of depreciating assets and equipment.

Example: sole trader using the floor area method

Ellen is a sole trader who runs an online business in the spare room (which is 10m² and set aside exclusively for business) of her 560m² home.

She spends $2,500 on electricity over the income year.

To work out how much she can claim as a deduction, she calculates the floor area of the spare room as a percentage of her entire home floor area and multiplies the result by the relevant expenditure:

(Floor area for business use divided by the total floor area of home) x relevant expenditure

(10m² ÷ 560m²) × $2,500 = $44.64

Ellen can claim $44.64 for the business portion of her annual electricity cost.

Actual cost method

You can use this method if you incur additional expenses running your business from home. You don’t need to have an area set aside exclusively for business, but you do need to keep records which show the amount:

  • you spend on expenses
  • you spend on depreciating assets you buy and use
  • of business-related use for your expenses and depreciating assets.

You must also keep all the receipts, bills and other documents which show the additional running expenses you incurred running your business from home.

This may include:

  • heating, cooling and lighting
  • phone and internet
  • decline in value (depreciation) of assets.

To calculate the actual cost of your expenses, you need to work out the periods of time that you use an area in your home for business.

One way you may be able to do this is by keeping a diary for a representative 4-week period showing how you use your home area for business purposes. You can then apply that as a pattern of use for the whole year. However, don’t forget to exclude periods when you were on holidays or not working because of illness.

If there’s no regular pattern of how you use your home area for business, you must keep records of:

  • each time you use the area during the year
  • what the area was used for.

Heating, cooling and lighting

Work out the actual cost of your heating, cooling and lighting by using the:

  • cost per unit of power used (your utility bill has this information)
  • average units used per hour, which is the power consumption per kilowatt hour for each appliance, equipment or light used
  • total annual hours used for business-related purposes by checking your record of hours worked or your diary.

Phone and internet

If you have a home telephone or mobile that you only use for your business, you can claim a deduction for all call, purchase and rental costs.

However, you can’t claim for the cost of installing a home telephone as this is a capital expense. The same rule applies to installing your internet.

If you use your phone for both business and private calls, you can claim a deduction only for the business use portion of phone expenses. If you have an itemised phone bill, you can work out the business use portion of the costs by:

  • counting the number of business calls you made and received and
  • dividing it by the number of total calls made and received.

For internet expenses, you can claim the proportion of time or data you used your internet for business use.

If you don’t have an itemised bill or a data breakdown, you can keep a diary for a representative 4-week period to work out your pattern of business calls or internet use throughout the year.

Decline in value (depreciation) of assets

A depreciating asset is an asset that has a limited effective life and can reasonably be expected to decline in value over the time it is used.

For example:

  • computers
  • electrical tools
  • photocopiers
  • furnishings
  • carpet and curtains.

If your business meets the eligibility criteria, you can immediately deduct the business portion of certain assets under temporary full expensing or the instant asset write-off, also known as simplified depreciation rules. Otherwise, you may be able to claim a deduction for the decline in value of your depreciating assets under the general depreciation rules.

If you use the revised fixed rate method, you can separately claim a deduction for the decline in value of your depreciating assets (such as office furniture, computer equipment or laptops).

If you use the temporary shortcut method (for the 2019–20, 2020–21 or 2021–22 income years), you can’t separately claim a deduction for the decline in value of depreciating assets or any other running expenses as they are included in the rate. When using this method, you must opt out of temporary full expensing for depreciating assets acquired after 6 October 2020,

Apportionment for business purposes

If you use a depreciating asset only for business purposes, you can claim a full deduction for its decline in value. However, if you also use the asset for private purposes, you can only claim the business use percentage of the decline in value.

You can estimate your business use percentage based on a diary record of your business and private use of the asset for a representative 4-week period. Your diary record must show:

  • what the asset was used for
  • whether the use was for business or private purposes
  • the period the asset was used for.

If you can claim a GST credit for a depreciating asset, you must first deduct the amount of the GST credit claim before working out the deduction for decline in value.

Source: ATO

How can we help?

If you have any questions or would like further information, please feel free to give our office on 08 9221 5522 or via email – info@camdenprofessionals.com.au  or arrange a time for a meeting so we can discuss your requirements in more detail.

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