Working from home has become normal for a lot of Australians, but the tax rules have not changed to make every home expense claimable just because your job has moved into your living room. The ATO has recently warned that some taxpayers are claiming rent, mortgage interest and other occupancy expenses that they are not actually entitled to, often because they have confused the rules that apply to employees with the rules that apply to a genuine home based business.
Two different types of expenses
| Type | What it covers | Who can usually claim it |
|---|---|---|
| Running expenses | Electricity, internet, phone, depreciation of a computer or desk | Most employees who work from home |
| Occupancy expenses | Rent, mortgage interest, council rates, home insurance | Only taxpayers who meet the ‘place of business’ test |
The ‘place of business’ test
To claim occupancy expenses, you need to be able to show all of the following:
- the area of your home you use for work has the character of a ‘place of business’
- if you are an employee, it was necessary for you to work from home because your employer did not provide you with an alternative place of business
- the nature of your income earning activities requires you to have a place of business
Is your home office really a ‘place of business’?
The ATO looks at whether the area of your home is:
- clearly identifiable as a place of business
- not readily capable of private or domestic use
- used exclusively, or almost exclusively, for work
- used regularly for client or customer visits
Two real examples
In plain terms, if the space could just as easily be used as a spare bedroom, a playroom or a home gym on the weekend, it is unlikely to meet this test, even if you personally only ever use it for work. Two examples the ATO uses help make the difference clear.
Priya works as a salesperson and is offered a promotion to manage a wider region. Her new role is based at her employer’s office in another city, but her employer is flexible and lets her work from home instead. Because her employer does provide her with an office, even though she chooses not to use it, Priya cannot claim occupancy expenses. She may still be able to claim running expenses for the time she spends working from home.
Abdul runs his own business from a dedicated office at home. Tradespeople and contractors regularly visit him there to discuss jobs, his business does not provide him with an alternative office anywhere else, and the nature of his work genuinely requires him to have a place of business. Abdul can claim a portion of his occupancy expenses, because he meets all three parts of the test.
What you can claim if you are eligible
If you meet the test, you can claim a portion of occupancy expenses based on the floor area used for work, how much of the year it was used, and your share of ownership if the property is jointly owned or rented.
Most employees will not meet this test. Choosing to work from home, even permanently or because it suits your lifestyle, does not on its own create a place of business. Most employees are instead limited to running expenses.
It is also worth knowing that claiming occupancy expenses is not free of downstream consequences. If part of your home has the character of a place of business, you may lose part of the main residence exemption from capital gains tax when you eventually sell the property, even just for the portion used for work. This is a genuine trade off worth discussing with us before you decide to claim occupancy expenses, not something to consider only when you come to sell.
Common working from home mistakes beyond occupancy expenses
Occupancy expenses are not the only area where WFH claims go wrong. Other common mistakes include claiming the full cost of an expense that is only partly work related, such as a home internet plan also used for streaming and browsing, claiming running expenses without any reasonable basis for the hours worked from home, and double claiming an item, such as claiming a laptop as a running expense in full while also depreciating it separately.
Keeping a simple, honest record of hours worked from home across the year, along with receipts for anything you plan to claim as an actual expense, avoids most of these issues before they start.
Working out your claim if you are eligible
If you do meet the place of business test, working out the deductible portion of occupancy expenses generally comes down to three figures: the floor area of the part of your home used as a place of business, expressed as a percentage of your home’s total floor area, the proportion of the year that area was set aside for work, and your share of ownership if the property is jointly owned or rented.
Multiplying your total occupancy expenses by these factors gives the deductible portion. It is a calculation worth doing with us rather than estimating, given how much rides on getting the place of business test right in the first place.
Frequently asked questions
Q. I work from home five days a week. Does that automatically qualify me for occupancy expenses?
No. Choosing to work from home, even permanently, does not on its own meet the place of business test, especially if your employer still has an office available to you.
Q. Can a sole trader claim occupancy expenses?
Possibly, if part of their home genuinely operates as their place of business. It is worth checking your specific situation with JMB before you claim.
Q. What happens if I claim occupancy expenses incorrectly?
It can trigger a review or audit, and you may need to repay the deduction along with interest and penalties.
Q. What is the difference between running expenses and the fixed rate method?
Running expenses are the underlying costs, like electricity, internet, phone and depreciation of equipment. The fixed rate method is simply one of the ways the ATO allows you to calculate a deduction for those running costs, without needing to work out the exact cost of every individual expense.
Q. Can my employer’s policy on working from home affect what I can claim?
It can be relevant to whether working from home was genuinely necessary, but it does not change the basic test. If your employer provides you with an office, choosing to work from home instead generally still will not qualify you for occupancy expenses, regardless of your employer’s policy.
Sources
ATO, Occupancy expenses: https://www.ato.gov.au/individuals-and-families/income-deductions-offsets-and-records/deductions-you-can-claim/work-related-deductions/working-from-home-expenses/occupancy-expenses