Changes to work from home deductions for employees

During the pandemic many employees were mandated to work from home.

Post pandemic most employers have continued to allow work from home arrangements.

In response the ATO has issued guidelines to assist employees calculate deductible expenses incurred while working from home (WFH deductions).

Practical Compliance Guide PCG 2023/1

Most recently, on 16 February 2023, the ATO finalised Practical Compliance Guide PCG 2023/1 outlining the options available for taxpayers to claim WFH deductions effective from 1 July 2022.

Previous guidelines provided employees with 3 options for calculating WFH deductions:

1. the shortcut 80 cents per hour method;
2. actual expense method; and
3. the fixed-rate of 52 cents per hour method.

PCG 2023/1 (applicable from 1 July 2022) states employees can no longer use the shortcut method to work out their WFH deductions.

PCG 2023/1 states employees can choose to apply the actual expense method in which case total WFH deductions for the year is based on actual costs incurred and be substantiated as per normal record keeping rules. Alternatively, employees can choose to use the revised fixed-rate method to calculate their total WFH deductions for the year, based on a rate of 67 cents per hour (increased from 52 cents).

The WFH expenses covered by the revised fixed rate method are in respect of the following kinds of additional running expenses:

• electricity and gas for lighting, heating, cooling and to run electronic items used for work;
• internet expenses;
• mobile and home phone expenses, and
• stationery and computer consumables.

The revised fixed-rate method allows an employee to claim WFH expenses of the kinds listed above at a rate of 67 cents per hour for each hour that they worked from home in a year. An employee who applies this method is unable to claim a separate deduction for any of the expenses listed above. For example, an employee uses their mobile phone when working from home as well as when working elsewhere (other than the home), total deduction for mobile phone expenses for the income year will be covered by the hourly rate of 67 cents per hour.

Conditions to apply the revised fixed-rate method and documentary evidence required

In order to be able to apply the revised fixed-rate method, an employee must satisfy all the requirements set out in PCG 2023/1. Broadly, these are:

• the work undertaken from home must be substantive and directly related to their income-producing activities. Minimal tasks such as occasionally checking emails or taking phone calls while at home will not qualify as working from home; and
• employees must keep records showing actual hours worked from home for the entire income year. The ATO will not accept an estimate of hours worked for the entire year even if it was determined based on actual hours worked from home during a particular period; and
• employees must also keep evidence (e.g., invoice, bill or credit card statement) for each of the above WFH expense deductions. Additionally the records must also show that the employee has incurred the relevant expenditure. Based on the examples provided in PCG 2023/1, we note that where the invoice or bill is in the name of one member of a household and each member of the household contributes to the payment of that expense, the ATO will accept that each household member who shared the cost will be taken to have incurred the relevant expenditure; and
• if a claim for depreciation is made (which is separate to and in addition to the fixed rate method WFH deduction), documents that meet the record keeping rules must be kept including evidence of the work-related use of the relevant asset over a 4-week period showing personal and income-producing use.

How is the WFH deduction calculated?

To work out the total WFH deductions for the income year where the revised fixed-rate method is used, an employee should apply the following methodology:

1. calculate the number of hours worked from home during the income year (based on timesheets, rosters, diary or similar documents kept contemporaneously);
2. multiply the total number of hours worked by 67 cents per hour;
3. calculate the work-related decline in value of any depreciating assets used while working from home during the income year and any other running expenses (supported by invoices) incurred which are not covered by the rate per hour;
4. add the amounts calculated at 2. and 3. and the aggregate is the total WFH deductions that an employee can claim for the income year (subject to evidentiary requirements being met).

What’s the next step?

Employees who chose not to use or who fail to comply with the conditions of PCG 2023/1 would be unable to use the revised fixed-rate method to calculate their WFH deductions for the year. Rather, WFH deductions must be based on actual expenses incurred. One of the possible benefits of using the revised fixed-rate method is the ATO states it will not apply compliance resources to reviewing WFH deductions claimed where the terms of PCG 2023/1 and the revised fixed-rate methods are used. Accordingly, if the intention is to claim WFH deductions for FY2023 it would be prudent for employees to review PCG 2023/1 in more detail before determining whether it will be used as the basis for WFH deductions.

Need more guidance on this topic or have any other questions? Please ask us via the Q&A portal.

If you would like to become a member, please contact us at admin@taxed.com.au.

Subscribe to our newsletter for more updates and articles.

This article provides a general summary of the subject covered as at the date it is published. It cannot be relied upon in relation to any specific instance. TaxEd Pty Ltd and any person connected with its production disclaim any liability in connection with any use. It is not intended to be, nor should it be relied upon as, a substitute for professional advice.