A UNSW tax expert explains how small businesses can make the most of their tax return if they’ve worked from home during the pandemic.
With tax time just around the corner, many business owners and operators need to consider a wider range of claimable deductions if they’ve worked from home during the pandemic.
The Australian Taxation Office (ATO) is expecting a higher number of deductions in tax returns this year and has taken precautionary measures against unsubstantiated and over-estimated work-related expenses.
It is therefore paramount to know exactly what to include (and what not to include) in your tax return.
Are you a small business working from home?
Employees are not the only ones who can claim home office expenses.
“If you are a contractor or small business who had to move your business online during lockdown – i.e. your home is now your headquarters – you will be able to claim the costs involved from working at home,” Professor of Practice Jennie Granger says.
She also advises using one of the following four methods when calculating your deductions:
1. The most convenient method: The 80-cent flat rate
The Australian Tax Office (ATO) has introduced a straightforward shortcut in recognition of the number of people working from home during the period 1 March to 30 June 2020. Using this shortcut, you can claim 80 cents per hour for all relevant running expenses incurred when working from home.
“The only record-keeping you have to do is to maintain a logbook with your work hours for at least four weeks to establish your pattern,” Professor Granger says.
This method is the easiest and probably the most generous – at least in households where there is more than one of you working from home.
2. For those with high internet and phone costs and who don’t have a dedicated home office: The 52-cent rate shortcut
The 52-cent rate is ATO’s ongoing short cut method. But it doesn’t apply to all expenses.
“The advantage is that the 52 cents per hour replaces calculating and itemising all your running costs such as the proportion of electricity (lighting, cooling/heating), depreciation of home office furniture and equipment, and consumables such as stationery and toner cartridge,” Professor Granger says.
While this can be a big-time saver, you will still need to calculate the work portion and claim your internet and phone expenses separately. You must also be able to demonstrate on a reasonable basis what is related to your work.
“This method will be more beneficial if you think your work internet and phone expenses will be high enough to be a bigger claim than under the 80-cent rate method. The 52-cent rate will more likely suit those who work from the couch or kitchen table and don’t need or have room for a dedicated home office,” she says.
“For internet usage and phone calls, the easiest method is to log your work calls and internet usage for four weeks to establish your pattern of work expenditure. You can then extrapolate on this basis for the rest of the year. If you don’t have a predictable pattern, you will need to dissect all your phone bills and log your internet usage.”
3. For those with a dedicated home office: The actual expenses method
This method requires the most work but could be the most worthwhile for those who have a dedicated home office that is used for work.
“To benefit from this method, you will need to measure your home office in square metres (and your home if you don’t already know it) so you can calculate your claim of the proportion of your house expenses such as lighting and heating,” Professor Granger says.
“You can also progressively write off the cost of equipment, furniture and furnishings that cost more than $300. But you will need to work out the depreciation (you can use the ATO depreciation tool) and calculate the work proportion you can claim.”
4. Some small businesses can claim occupancy expenses
Some businesses may also be able to use a fourth method and claim a share of their occupancy expenses.
Professor Granger explains that if a person is running a business out of their home in a dedicated area, they may be eligible to claim a proportion of their occupancy expenses.
“Occupancy expenses are those you pay to own, rent or use your home such as mortgage interest or rental payments, home insurance and bills,” she says.
To be eligible for the above claims, the ATO advises businesses to prove – not only that they have set aside an area in their home – but also that it is in character a place of business.
The ATO provides some useful examples of what they see as indicators of a business character:
- identifiable as a place of business (e.g. business sign at the front of your house)
- not readily suitable or adaptable for private or domestic use (e.g. hairdresser’s home salon)
- used exclusively or almost exclusively for your business
- used regularly for visits by your clients
“But there is a catch. If you claim occupancy expenses, you may have to pay tax on any capital gains you make when you sell your home. So, keep good records until you sell that property including a record of how long you used the property as a place of business,” Professor Granger says.
Immediate deduction for new assets
If you have had to purchase equipment to adapt your business after 12 March 2020, you may be able to claim the costs incurred immediately in next year’s tax return instead of writing them off over time.
“Special rules apply to assets costing less than $150,000 and to businesses that have an aggregated turnover of less than $500 million. Aggregated turnover means you must include any affiliated businesses when working out your eligibility,” Professor Granger says.
But there is a caveat to this deduction. The golden rule is that the equipment must be purchased after 12 March 2020 and installed and ready for use before 30 June 2020.
“You can spend up to $150,000 per asset and you can include the cost of peripherals and incidental costs such as delivery and installation costs. A tip would be to make sure that you have opted for delivery and completed any fit-out or customisation (e.g. signage painted on side of a new vehicle) by 30 June 2020. The expenditure will not be eligible for deduction unless it is ready for use by this date.”
JobKeeper payments are classified as income
If you are participating in the JobKeeper scheme, as an employer, you pay the salaries or wages first and then get reimbursed by the ATO through JobKeeper.
So, even though the funds are essentially passing through your business to your employees, it is regarded as ‘business income for tax purposes’ and must be included in your business assessable income.
“You can offset it by claiming the payments made to your employees in your deductibles just as you do now with salaries or wages you pay your employees. The net tax effect should be zero.”
However, if you are a sole trader looking to lodge your tax return early (before JobKeeper payments are made available to the ATO by end of July), you will have to manually add them in your income statements.