ATO warns of major change to tax shortcut

Australians are being warned to start doing this thing from next month as a popular tax shortcut is being changed.

Australians who continue to work from home after this month are being warned to keep accurate records as a popular tax deduction shortcut comes to an end.

Australian tax office shortcut method for calculating work-from-home expenses, introduced in 2020 during the pandemic, ends June 30, 2022.

“The 80-cent shortcut rate has been around for a few years now — it’s rarely the best method of calculating your home business expenses in terms of the size of the deduction, but it has the great virtue of simplicity,” said H&R Block. Director of Tax Communications Mark Chapman.

“It consolidates all homework deductions – heating, cleaning, depreciation, cell phone use – into one penny per hour.”

For the 2022-23 fiscal year, taxpayers will have to use either the fixed rate method or the actual cost method to demand work from home.

The ATO estimates that 4.8 million taxpayers claimed about $4 billion in work-from-home expenses on their 2020-21 return.

Of these, approximately one million are estimated to have used the shortcut method.

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Shortcut method

The shortcut method, which can still be used for this year’s tax return, allows taxpayers to claim 80 cents for each hour worked from home.

It covers all expenses, including telephone, internet, decline in value of equipment and furniture, electricity and gas, and only requires the taxpayer to keep a record of hours worked from home, such as a time sheet , a list or a log.

“You can use this method if you have worked from home and have incurred additional operating expenses as a result, [and] have a record of how many hours you have worked from home,” the ATO says.

In contrast, the fixed rate method and the actual cost method are more complicated and require more detailed records.

Fixed rate method

Using the flat rate method, taxpayers can claim 52 cents for each hour worked from home. This rate includes the decline in value of home office furniture such as a desk, electricity and gas, and cleaning.

“All you have to do to claim this is keep a diary – write down the time you start work each day, the time you finish work each day, and the breaks,” Mr. Chapman.

“You can then claim 52 cents per hour for each hour of work. Additionally – and this is what makes this rate different from the 80 cent temporary rate – you can also make separate claims for the proportion of work-related items such as your home internet, mobile phone charges and other expenses. other expenses directly related to your work. such as stationery and printer ink.

These additional deductions require itemized receipts or other written evidence.

To claim telephone costs, for example, the taxpayer must have telephone accounts identifying work-related calls and private calls to calculate the percentage over a typical four-week period.

And to claim Internet expenses and depreciated assets, they must keep a log showing their work-related Internet use and the percentage of the year they use their depreciated assets exclusively for work.

“If you don’t have a representative four-week period of your work-from-home hours or business use of your phone, internet, and depreciating assets, as they vary throughout the year from income, you will need to keep records for the entire year of income,” says the ATO.

Actual cost method

The actual cost method, as the name suggests, allows the taxpayer to claim a deduction for the actual expenses he incurs as a result of working from home.

Deductions for depreciation of assets, cleaning costs, electricity and gas, telephone and internet and computer consumables are calculated individually and require detailed evidence, including receipts and logs used to calculate the percentage linked to the work of each.

“With the actual cost method, you’ll need to keep a diary of your homework for a typical four-week period and you’ll also need to figure out how much square footage of your home, by floor space, you’re using as workspace. work,” Mr. Chapman said.

“From there, you can then work out how much of your household spending is work-related and apply that percentage to the actual amount you spend on electricity, gas, water, phone and internet. You should also keep all original invoices to prove your claim. »

For example, to claim cleaning costs for a space set up as a home office, the taxpayer must add up their receipts and multiply the total by the floor area of ​​the dedicated work space, divided by the total floor area of ​​the home.

They then reduce this amount by the percentage of private use by the taxpayer and home office use by other household members.

The ATO notes that people cannot claim additional running costs if other household members who do not work from home are in the same room.

For example, “Lee works from his living room while his partner and three children watch television. Lee does not incur any additional costs for lighting, heating, or air conditioning as a result of working in this room, so she cannot claim a deduction for them. »

What to do from July

Mr Chapman said it was essential to start keeping records from the start of the exercise.

“Taxpayers should be aware now that they will need to keep records to justify expenses such as home internet, cellphone costs and depreciation of home technology,” he said.

“In addition, they will have to justify their work [slash] fractionation for personal use. Don’t wait until later in the tax year to keep them, you must keep proper records starting July 1.

Some experts have warned that the demise of the shortcut method will significantly increase the administrative challenge for taxpayers in the coming year.

“It can be very difficult to determine the extent to which phone and data plans are used for taxable purposes, as most people do not receive itemized bills these days, and there are download volumes these days. much larger in homes for personal use such as streaming TV shows and movies,” the Tax Institute’s senior counsel, Robyn Jacobsonsay it Australian Financial Review.

“The flat rate method also requires the taxpayer to have a dedicated workspace that they use when working from home.”

She added that the 52-cent rate may no longer be appropriate given rising electricity and gas costs.

“We are looking to modernize working from home methods for the 2022-23 fiscal year and we will consult as we always do and hope to be able to provide information on this later in the calendar year,” said the deputy commissioner of ATO Tim Loh in a statement.

“It is important that taxpayers keep good records so that for the 2022-23 financial year they have the choice of the method of working from home that is most appropriate to their situation, including records of all hours worked from home, receipts for all depreciating assets and materials used while working from home, [and] records of personal and business use of assets and work-from-home expenses.

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