Take Care When Claiming Occupancy Expenses for Working From Home
With more Australians working remotely, the ATO continues to scrutinise claims for working from home expenses. One area that often causes confusion is the difference between running expenses and occupancy expenses.
Understanding the distinction can help you claim the deductions you’re entitled to while avoiding costly mistakes.
Understanding Working From Home Tax Deductions
If you work from home, you may be able to claim some of the additional costs you incur while performing your employment duties. However, not all home-related expenses qualify for a tax deduction.
The type of expenses you can claim depends on your circumstances and the nature of your work arrangement.
What Are Running Expenses?
Running expenses are the additional costs associated with working from home.
These expenses may include:
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- Electricity for heating, cooling and lighting
- Internet and data costs
- Mobile phone and home phone expenses
- Stationery and office supplies
- Computer consumables such as printer ink
- The decline in value of office furniture and equipment not supplied by your employer
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To claim these expenses, you generally must:
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- Work from home to perform your substantive employment duties
- Incur additional costs as a result of working from home
- Keep records that support your claim
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You cannot claim any expenses that your employer has reimbursed.
Calculating Your Work From Home Deduction
The ATO currently allows employees to calculate eligible working from home expenses using either:
Fixed Rate Method
The fixed rate method allows eligible taxpayers to claim a set rate for each hour worked from home, covering a range of common running expenses.
Actual Cost Method
The actual cost method allows taxpayers to claim the actual work-related portion of eligible expenses based on records and calculations.
The method that provides the best outcome will depend on your individual circumstances and record-keeping.
What Are Occupancy Expenses?
Occupancy expenses differ from running expenses because they relate to the costs of owning or renting your home.
Examples include:
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- Mortgage interest
- Rent
- Council rates
- Water rates
- Land tax
- Home insurance premiums
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Many taxpayers assume they can claim these costs when working from home, but this is rarely the case.
When Can You Claim Occupancy Expenses?
For employees, occupancy expenses are generally not deductible unless the area used for work has the character of a genuine place of business.
This threshold is significantly higher than simply having a desk, study or spare room where you occasionally work.
In most cases, employees who work from home will only be eligible to claim running expenses.
How to Apportion Occupancy Expenses
If you do qualify to claim occupancy expenses, you can only claim the work-related portion of those costs.
This usually requires you to apportion expenses based on factors such as:
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- The floor area dedicated to work activities
- The period the area was used for work purposes
- Your ownership interest in the property
- Any shared rental arrangements
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Maintaining accurate records is essential to support your calculations.
Be Aware of Capital Gains Tax Implications
Before claiming occupancy expenses, it’s important to understand there may be longer-term tax consequences.
Using part of your home as a place of business can affect your eligibility for the main residence capital gains tax (CGT) exemption when you sell the property.
As a result, a deduction claimed today could potentially increase your capital gains tax liability in the future.
Keep Good Records and Seek Advice
The ATO continues to review claims for working from home deductions, particularly where taxpayers incorrectly claim occupancy expenses.
Keeping detailed records and understanding the rules can help you maximise legitimate deductions while remaining compliant.
If you’re unsure what you can claim, seeking professional tax advice can help ensure your working from home deductions are accurate and appropriately supported.
Common Mistakes to Avoid When Claiming Working From Home Expenses
Many taxpayers make honest mistakes when claiming working from home deductions. Being aware of these common errors can help you avoid ATO scrutiny and ensure your claim is accurate.
1. Claiming Occupancy Expenses Without Meeting the Requirements
One of the most common mistakes is claiming rent, mortgage interest or other occupancy expenses simply because you work from home.
For employees, these expenses are generally only deductible if the work area has the character of a genuine place of business. Having a home office or spare room used for work is not automatically enough.
2. Claiming Expenses That Have Been Reimbursed
You cannot claim a deduction for expenses that your employer has already reimbursed. This includes equipment, internet costs, office supplies or other work-related expenses that your employer has paid for on your behalf.
3. Failing to Keep Adequate Records
The ATO requires taxpayers to keep records that support their claims. Depending on the method used, this may include:
- Timesheets or records of hours worked from home
- Receipts and invoices
- Utility bills
- Internet and phone records
- Evidence of equipment purchases
Without appropriate records, your claim may not be supported if reviewed by the ATO.
4. Claiming Private Expenses as Work-Related
Only the work-related portion of an expense is deductible. Many taxpayers incorrectly claim 100% of internet, phone or home office costs when those services are also used for personal purposes.
You must calculate and claim only the portion that relates to earning your income.
5. Overlooking Capital Gains Tax Consequences
Taxpayers who qualify to claim occupancy expenses sometimes focus on the immediate deduction without considering the longer-term implications.
Using part of your home as a place of business may affect your eligibility for the main residence capital gains tax exemption when the property is sold. Understanding these consequences before making a claim is important.
6. Assuming Every Work-From-Home Arrangement Is the Same
The rules can vary depending on your employment situation, the type of work you perform and the way your home office is used. A deduction available to one taxpayer may not apply to another.
When in doubt, seek professional advice to ensure your claim is both accurate and compliant.
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Important: Clients should not act solely on the basis of the material contained here. Items herein are general comments only and do not constitute or convey advice per se. Also, changes in legislation may occur quickly. We, therefore, recommend that our formal advice be sought before acting in any of the areas.
