Many employees are now working from home, great, I don’t have to travel to work, and my house is now a tax deduction, how goods that. I thought for a different workplace theme, and get away from vaccinations, unfair dismissals, Fair work Commission matters, we would look at the issue. Now A Whole New Approach are not tax accountants or lawyers, but leading workplace advisors. Get licensed tax accountants advice if you have concerns, or give us a call, I don’t mind.
Working from Home: Claiming Tax Deductions on Occupancy Expenses
In order to claim working from home expenses in the first place, you must be working from home to fulfil your employment duties and not just be carrying out occasional or trivial tasks (i.e. checking emails or taking phone calls), and you must be incurring additional expenses as a result of working from home. However, occupancy expenses are generally not deductible from your assessable income.
The ATO has held that as rent payments are a form of occupancy costs, they are considered expenses of a ‘private or domestic nature”, meaning they are generally not deductible even where part of the rented home is being used as a home office. The Income Tax Assessment Act 1997 (Cth) states that expenses are deductible from assessable income if they are “incurred in gaining or producing your assessable income” or if they are necessary for carrying on a business for that purpose. However, one of the exceptions to this is that expenses of a “private or a domestic nature” cannot be deducted, such as occupancy expenses (i.e. rent, mortgage, interest) and running expenses (i.e. electricity, furniture). Nevertheless, rent deductions may be claimed if that part of the home is being used exclusively for the purposes of income-producing activities and there is no alternative place of business available.
Place of Business
In Taxation Ruling TR 93/30, the Commissioner of Taxation held that deductions on occupancy and running expenses may be made where the home office has the character of a “place of business”, rather than being merely a “private study”.
“where part of the home is used for income producing activities and has the character of a ‘place of business’…some of the expenses incurred in respect of the home such as rent, interest, repairs, house and contents insurance, rates and property taxes, may be partly deductible”.
Therefore, a distinction is drawn between an area of the home that can be identified as a place of business, as compared to a room that is used as a study or a home office for a matter of mere convenience. In cases where the area is classified as a place of business, tax deductions are allowable because the space loses its domestic character and takes on a business or businesslike character.
Whether an area of the home is a place of business will depend on the circumstances, but the following factors point towards such a finding:
- The area is separate and distinct from the rest of your home and it is clearly identifiable as a place of business;
- The area cannot readily be used for private or domestic purposes that coincide with the use of the rest of the home more generally;
- The area is used exclusively or almost exclusively for carrying on a business;
- The area is used regularly for visits of clients or customers.
On the other hand, a private study is an area (i.e. office or study at home) that you only use as a matter of convenience, so that you can complete work from home, which could otherwise have been done at your place of business or employment. Examples of situations where an area was held to be a private study, rather than a place of business, include:
- A barrister’s home office where they read client briefs.
- A teacher’s desk at home where they prepare lesson plans or mark assignments.
- An insurance agent’s home office where they store their client files and occasionally interview they clients.
In these examples, the areas in question retained their private or domestic character and were not held to be a place of business.
However, the requirement that is space must be separate and distinct and cannot readily be used for private and domestic purposes, may disqualify a vast majority of people who are working from home because they are working from the sofa, the lounge room or the dining table.
Another relevant consideration is whether there are any alternative workplaces for conducting income-producing activities. If there is no alternative place of business, it is necessary to work from home, and the area used is only for income producing purposes, then the court or tribunal is more likely to find that the relevant area is a place of business for the purposes of tax deductions.
During the lockdowns and enforcement of restrictions, it can be said that the office remains inaccessible as employees are directed to work from home where possible. As a result, many employers have closed their offices and instructed their employees to continue operations from home. Therefore, there is no alternative place of business available and it is necessary to work from home.
What expenses can I claim?
The Australian Taxation Office (ATO) has published guidelines online regarding ‘Working from home during COVID-19’ which explain the deductions that can be claimed and the processes for doing so. The deductions listed on their site refer largely to running expenses, including:
- Electricity expenses, such as heating, cooling and lighting for the area you are working in and the items you are using to work.
- Cleaning costs incurred for the dedicated working area.
- Phone and internet expenses.
- Computer consumables (i.e. paper, ink) and stationery.
- Home office equipment, such as computers, phones, furniture.
Some restrictions do apply to these deductions, but they can be claimed by almost everyone who is working from home, even if your home office classifies merely as a “private study”.
On the other hand, if your home office can be classified as a “place of business”, then it may be possible to claim deductions in rent, mortgage or interest. If occupancy expenses are deductible, then the actual amount which can be claimed may depend on the apportionment of total expenses occurred, according to floor area and time (i.e. the period of the year in which the room was being used to produce income).
But what about Capital Gains Tax?
Capital Gains Tax (CGT) is the tax paid on profits from selling assets, such as property. If you sell your house and make a profit on this sale, meaning you selling it at a price higher than what you purchased it for, this additional profit will be your capital gain. However, if your property falls within the recognised categories, then a tax will be applied to that capital gain, which you must pay to the ATO.
In general, your main residence (i.e. your home) is exempt from CGT, but it may apply if you use your home for business. This means that if your home office is considered a “place of business” and you subsequently claim tax deductions for occupancy expenses, then at the point in time when you sell your home, the CGT will be applied to this sale because a portion of the home was used for business and income-producing purposes.
An important caveat to note is that if your home office satisfies the conditions of being a “place of business”, even if you do not claim home occupancy expenses in your income tax return the CGT will still apply when you sell your home. The ‘interest deductibility test’ is as follows:
“If you use part of your home for rent or business, you would be allowed a tax deduction for part of any home loan interest. Your home is subject to CGT to the same extent.”
This means that the extent to which you are eligible to claim tax deductions because your home is a “place of business”, is the extent to which the CGT will apply when you sell your home. As previously mentioned, even if you do not actually claim the deduction, the CGT will apply if the interest deductibility test is satisfied.
So what should I do?
Ultimately, the choice is yours. There is a high threshold to be met for your home office to quality as being a “place of business” in order for you to be able to claim tax deductions for occupancy expenses. However, if it is classified as such, then you will also be partially liable for paying the CGT upon the disposal of your property.
The benefit of claiming occupancy expenses is that you will receive a greater portion of your assessable income back from tax returns, but this amount will later be offset by the application of the CGT, which is applied at the same rate as your income tax (for individuals).
Regardless of whether you claim occupancy expenses or not, as an employee working from home, you are able to claim running expenses for the time you are completing income-producing work. Please see the Australian Taxation Office website for further details and instructions.
Having been in business for 40 odd years, my view is get your reductions properly, or leave it completely alone, having the attitude of go “I’ll claim half away”, “I’m not sure what I’m doing, I’ll claim, I little bit, but I don’t want to upset the tax office”, this approach ends in tears. Be careful, particularly at the moment the tax office knows allot of employees working from home will give it a go, try it on. The ATO is not your friend, lets be honest, rich people don’t pay tax in this country, its employees working from home, sort of “low hanging fruit”, that’s easy pickings for the tax office.
If you have other issues around working from home, returning to work, Fair work Commission matters, unfair dismissals, general protections, workplace investigations give us a call, advice is free and confidential. 1800 333 666
 ‘Working from Home’, Australian Taxation Office (Web Page, 1 July 2021) < https://www.ato.gov.au/individuals/income-and-deductions/deductions-you-can-claim/home-office-expenses/>
 Income Tax Assessment Act 1997 (Cth) s 8.1.
 Taxation Ruling TR 93/30,  (‘Taxation 1’).
 Swinford v FC of T (1984) 15 ATR 1154.
 Taxation 1 .
 Handley v FC of T (1981) 11 ATR 644; Forsyth v FC of T (1981) 11 ATR 657).
 ‘Be careful what you claim for when working from home. There are capital gains tax risks.’ The Conversation (Web Page, 30 June 2020) <https://theconversation.com/be-careful-what-you-claim-for-when-working-from-home-there-are-capital-gains-tax-risks-141364>.
 Taxation 1 .
 ‘Working from Home during COVID-19’, Australian Taxation Office (Web Page, 17 December 2020) < https://www.ato.gov.au/general/covid-19/support-for-individuals-and-employees/employees-working-from-home/>.
 Taxation 1 .
 ‘Capital gains tax’, Australian Taxation Office (Web Page, 4 August 2021) <https://www.ato.gov.au/Individuals/Capital-gains-tax/>.
 ‘List of CGT assets and exemptions’, Australian Taxation Office (Web Page, 4 August 2021) https://www.ato.gov.au/Individuals/Capital-gains-tax/List-of-cgt-assets-and-exemptions/#Yourmainresidenceyourhome.
 ‘Using your home for rental or business’, Australian Taxation Office (Web Page, 4 August 2021) <https://www.ato.gov.au/Individuals/Capital-gains-tax/Property-and-capital-gains-tax/Your-main-residence-(home)/Using-your-home-for-rental-or-business/>.