Due to COVID-19, many of us have been working from home. With reality sinking in, people are beginning to ask an important question, "What is tax deductible, now that I am working from home, and how much cash back can I receive?"
As if in direct response to the current work situation, the Commissioner of Taxation released TR 2020/1. TR 2020/1 is neither extraordinary nor is it controversial. In a way, it can be described as the introductory section and table of contents to the ATO's compendium on employee deductions for work expenses. However, it serves as a good reminder of when employees can deduct a work expense and the supporting evidence required.
The main takeaways are:
- An employee can deduct a work from home expense to the extent that the expense is incurred in the course of earning their employment income (under the general deduction rules). It is the employee who must have actually paid for, or who must have had the definitive obligation to pay, that expense. If another person reimburses you, you lose the deduction.
- As with all rules, there are exceptions. For example, a work expense for a "capital" asset cannot be deducted under the general rule (although deductions might be available for the decline in value of that asset if it is used to earn employment income). The most common example of such an asset is a laptop used for employment activities. Other exceptions include expenses that are "private" or "domestic" in nature and expenses incurred in earning income that is not taxed in Australia.
- "Private" means "personal". "Domestic" means "relating to the home, household or household affairs".
- Everyday clothing, personal grooming items and food and drink are usually "private" expense items. However, if these items have a sufficiently close and real connection to the activities from which you earn your employment income, a deduction might be available (for example, food and drink expenses in the course of overnight travel away from home for work purposes - quite the opposite to work from home!).
- The "domestic" carve out usually excludes home-occupancy expenses such as rent, mortgage interest, rates and insurance, even if a portion of the residence is a dedicated (work) home office space, unless a portion of the residence is properly characterised as a place of business (e.g. a doctor's clinic). The position relating to home-running expenses, however, is more generous. While working from home, running expenses (e.g. phone and internet expenses, electricity charges for heating/cooling and lighting, and depreciation) may be deductible to the extent that they are incurred in earning employment income (that is, while working from home).
- If you can claim a deduction for work from home expenses, you must be able to substantiate the expense with written evidence, whether in paper or electronic form. Exceptions may apply.
Temporary shortcut for home-running expenses
On 7 April 2020, the ATO published a media release providing a "new working from home shortcut" calculation method for taxpayers in respect of home-running expenses incurred between 1 March 2020 and 30 June 2020. Under the temporary shortcut method:
- people working from home can claim running expenses at a rate of 80 cents per work hour, rather than having to perform a calculation of costs for specific running expenses - they just need to keep a record of the number of hours worked from home;
- the requirement to have a dedicated work from home area has been removed;
- the usual methods of calculating deductible running expenses can be used if preferred;
- the taxpayer must have spent the money themselves and not have been reimbursed; and
- the claim must be directly related to earning income and there must be a record to substantiate the claim.
How can we help employers?
TR 2020/1 is also relevant to employers. This is because work expenses that would have been deductible by an employee reduces the taxable value of an employer's fringe benefits tax liability in circumstances where the employer, rather than the employee, incurs that expense (for example, by way of reimbursement).
Particularly during this period, employers may offer to reimburse employees for the cost of purchasing monitor screens, keyboards and many other things for use while working from home. TR 2020/1 will help employers determine whether these amounts would have been otherwise deductible by employees and therefore applied to reduce the taxable value of the expense payment benefit for the purposes of calculating the employer's fringe benefits tax liability.
We can help review your expense policies and related records to determine whether you have a fringe benefits tax liability and the extent to which the otherwise deductible rule may reduce the taxable value of any expense payment benefits you may be providing to your employees.
FURTHER INFORMATION
If you would like to draw from other global resources developed by Baker McKenzie on COVID-19, please visit our COVID-19 Resource Centre.
