The ATO explains changes to working from home deductions

Garreth Hanley:
This is With Interest, a business, finance, and accounting news podcast brought to you by CPA Australia.

Elinor Kasapidis:
Hello, and welcome to CPA Australia's, With Interest, podcast. I'm Elinor Kasapidis, Senior Manager of Tax Policy at CPA Australia. In this episode of With Interest, we'll be discussing the changes to working from home deductions, what they mean for you, and cover what's included in the updated 67 cents per hour fixed-rate method. These changes will apply from this tax year, which runs from the 1st of July, 2022 to the 30th of June, 2023. Joining me to walk us through the changes is ATO Assistant Commissioner, Tim Loh. Welcome to With Interest, Tim.

Tim Loh:
Thanks for having me, Elinor.

Elinor Kasapidis:
Tim, flexible working was already happening in the 2000s as tech improved, but Covid really accelerated that shift in many occupations, I suspect on a permanent basis. What changes has the ATO seen in the working habits of Australians pre and post Covid?

Tim Loh:
You're right, El. Yeah. In the 2018/2019 income year, we had around 2 million Aussies claiming working from home expenses. Now with working from home, certainly more common people having hybrid working arrangements, we've seen just under 5 million taxpayers claiming working from home deduction in the 2021/2022 tax returns. Now with a 33% increase in the amount claim, so $4.14 billion claimed in 2020/2021 returns, compared to $3.11 billion in 2019/2020 tax returns. Similarly, the average claim amount also increased from the $650 to $830. Now, we've seen claims for car and travel expenses remain lower in the 2021/ 2022 returns with people not travelling as much for work during the prior year. Although with people being able to travel again, this is likely to translate into increased work-related travel deductions, next tax time.

Elinor Kasapidis:
Those are some massive numbers, 5 million taxpayers. And obviously you're keeping an eye on the movements and the shifts in the claims. The ATO puts out a lot of guidance on work-related deductions. Tim, you do a great job across the media letting people know about what they're allowed to claim. What's the ATO's approach to making sure taxpayers get their deductions right?

Tim Loh:
Thanks El. Great question. We do invest our efforts in educating taxpayers through a range of activities. I'd try and do as many media appearances as possible: morning, day, and night. And it helps when people like yourself, El, do media just as well as I do it and also give great advice. We also have various other channels like direct emails, our ATO website, social media, and our ATO community. And we continue to work with third parties like, yourself in the CPA, to help share our information and support people to get their deductions right. We do have a suite of handy occupation guides and fact sheets too.

They're a great resource where we've developed tailored information about what taxpayers may be eligible to claim based on the occupation. And we also produce a range of products to help take the guesswork out of deductions. In terms of compliance, our super computers review every return and we have risk models and detection methods that we deploy. For example, our systems will immediately detect and often warn taxpayers where deductions are unusually high. We compare our deductions in other lodgement details with similar taxpayers so we have a good idea of what your deductions should be. Now, when claims are unusually high, we'll always take a second look and when we do, we will ask a lot of questions. And your return will be delayed. Now for tax professionals specifically, we do have our newsletters, webcast, videos, and forums, but we also publish more detailed guidance on our legal database.

Now, for example, with the working from home change that we're talking about today, we've published simplified, easy to understand, website content on ato.gov.au. But then we also have more technical content published on the legal database as I said before. We've got things like the Taxation Ruling TR 93/30, which is income tax deductions for home office expenses, which sets out our view on the deductibility of expenses that taxpayers incur as a result of working from home. And as you know El, we've also got the Practical Compliance Guideline, PCG 2023/1, claiming a deduction for additional running expenses incurred while working from home, which is the ATO's compliance approach, which explains what the revised fixed-rate method is and the criterion for relying on the PCG.

Elinor Kasapidis:
The tax ruling and the PCG are some light weekend reading, and now that you have finalised the practical compliance guideline, it's the first cab off the rank this year. It sets out a new revised fixed-rate for work from home deductions of 67 cents per hour, work from home. The previous fixed-rate was 52 cents per hour. The shortcut method is also no longer available. Tim, what's the reason for these changes?

Tim Loh:
Yeah, look, the shortcut method was always a temporary measure that we introduced during the height of the COVID-19 pandemic. As you can appreciate, a large proportion of the workforce transitioned to working from home for the first time. That was that 3 million difference that I mentioned before. When we developed that shortcut method, we did take into account the fact that many Aussies didn't have a separate home office, which meant they couldn't have been legible to use that prior fixed-rate method. And the shortcut, as I said before, was always intended to be that temporary measure. And we know some taxpayers prefer the ease of the shortcut method, which is why we've revised the fixed-rate method to include items that can be hard to apportion and hard to prove their work-related use. These changes were also based on community feedback about limitations within the previous fixed-rate method and the temporary shortcut methods.

Elinor Kasapidis:
It's really good that you've adopted the feedback and the benefits from both of the methods. And I personally, having worked from my bedroom for the past three years, are quite happy about the revised fixed-rate. Reading the fine print, the revised fixed-rate does cover a different range of running expenses to the previous method. What are the differences?

Tim Loh:
Yeah, look, the revised fixed-rate has been designed to better reflect those contemporary working arrangements. So whether you've been working on the kitchen bench, the dining table, and the bedroom, whilst also making it easy for taxpayers to calculate their expenses. There's a few key changes, the revised fixed-rate method, the first is the increase rate from 52 cents per hour to 67 cents per hour, which is effectively about a 28% increase in the rate.

We've also removed, as I said before, the requirement to have a separate home office or a dedicated workspace. And in terms of what's incorporated, the expenses are the ones that are difficult to apportion. So things like your phone usage, your internet expenses, electricity and gas, as well as computer consumables and stationary. And on top of that, taxpayers can also separately claim that the decline in value of any work-related equipment. That can be things like your desk and chairs if you've bought those during the year, or also technological items like your iPads, laptops, and computers.

You can claim any of those decline in value or depreciation provided it's for work-related use. The other key change to also note is the records that must be kept. Taxpayers are required to keep records of the number of hours they've been working from home. Now we've got some transitional provisions in place for part of this financial year. So from basically the 1st of July, 2022 to the 28 February, 2023. In that period, you can have a representative period in order to claim and work out your working from home hours. Now once that period passes, and in terms of that representative period, from the 1st of March, 2023, you'll need a diary or time sheet entries to document the number of hours you've been working from home. The other thing to also note with the revised fixed-rate method is you also need to keep evidence of some of the expenses that you might have incurred that are covered by the revised fixed-rate methods.

So for example, if you had telephone expenses, you just need to make sure that you've got a at least one bill there to document the fact that you've incurred those expenses. In terms of the changes or the differences between the various methods, one thing to note is the requirement to have a separate home office or dedicated work area is no longer required. As I said before, the rate amounts changed, the inclusion of phone and internet expenses, exclusion of office furniture and office furnishings, which will be calculated separately, as I mentioned before. There's also the exclusion of cleaning expenses, again, which can be separately claimed. And as I mentioned before, there is that change in the record keeping requirements. Now in terms of the method, in why we did what we did, we've tried to take a really practical approach. As I said before, there's those items which are notoriously difficult and tedious for everyday Aussies to calculate that work use.

That's those phone and internet and electricity costs which are now obviously included in the rate. And as I said before, the assets that typically give taxpayers a bigger tax deduction and where people usually also have records because they normally have warranties for things like your laptops and iPads, they're going to be claimed separately in the form of a declining value or depreciation deduction for the work-related component. Now, one thing to just remember if you are going to be claiming for assets and equipment using decline in value is those rules associated with that. And so for example, if taxpayers have bought equipment for work that costs more than $300 and they won't be able to claim a full deduction immediately for those items, and they must claim the deduction over a number of years, which is known as the decline in value or depreciation, which takes into account the effective life of the asset and the number of days during the year that they own and use it work for work purposes. Now, we've got some fantastic online calculators to help people work out the declining value of assets and equipment. And if you need to, you can also speak to your registered tax agent, get advice from them.

Elinor Kasapidis:
Thanks so much, Tim. You've managed to summarise the PCG, which is multiple pages in just a couple of minutes. I think those key messages around the changes, being able to claim assets separately, but making sure you've got your records and sticking to the rules, it's really important to keep in mind. Now, there are a few criteria to be able to use the 67 cents per hour method. What are they?

Tim Loh:
Look, to claim a deduction for working for home expenses, taxpayers must incur additional running expenses as a result of working from home. Must be working from home to fulfil their employment duties. So not just completing the minimal task. For example, if you're just looking at the odd email or you're just taking the odd phone call from the boss, that's not going to cut it. And the third thing, and probably the most important thing, and I'm going to sound like a broken record by the end of this, El, is that you've got to keep records and the best form of record is having a diary or time sheet entries to document the number of hours you've worked from home and also having bills to represent the expenses that you've incurred. Now, to calculate your working from home expenses. We have talked in depth around the revised fixed-rate method, but we also have the actual cost method, which hasn't changed, which requires really good records in order for you to use that particular method. But as I said before, it's really important to be eligible to use any of those two methods, you need really good records.

Elinor Kasapidis:
Awesome, thanks Tim. What I'm hearing there is really you need to set yourself up at the start of the year if you're going to claim deductions. So things like even if I'm going to claim a computer that I use at home, I really need to know how much of that is work use versus personal use. I need to be collecting my receipts right from the beginning. And of course, you've got that transitional criteria where you can use a representative period until the 28th of February. Jackie Blondell: If you're enjoying this podcast, you should check out our in-depth business and finance show, INTHEBLACK. This month, in our career hacks series, we're talking with recruiters, job market experts, and career coaches to get their advice on the best way to navigate 2023's employment and workplace landscape. Search for INTHEBLACK on your favourite podcast app today and now, back to With Interest.

Elinor Kasapidis:
That's fantastic. Now the Practical Compliance Guideline does mention not being able to rely on the guideline if you fail any of the criteria such as not having satisfactory records. What does that mean in everyday language?

Tim Loh:
No records equals no deductions. It's as simple as that. We are asking people to make sure you've got those records and that's why we put that transitional provision in place to make sure that people have the opportunity to access that revised fixed-rate method by just having that representative diary.

Elinor Kasapidis:
I'm going to sound like a broken record too, and I think that this applies to all taxation really, regardless of if you're an employee or you're working at home as an individual or a sole trader or if you have a business, a lot of the time your super computers will pick up things and questions will be asked. I understand you actually do thousands of these reviews in work-related expenses a year. So many Australians do use a tax agent to help get their tax returns right. From the ATO's perspective, what are taxpayers required to be able to show their tax agent in relation to the revised fixed-rate method or more generally?

Tim Loh:
Yeah, look, the last time I was on the CPA podcast in May last year, I did speak about a few expectations and I think it's worth reaffirming today. I think the first thing's first, look, it's really important to keep your skills and knowledge up to date and align to your client base. So as my Second Commissioner, Jeremy Hirschhorn says, "To hit that goldilocks' spot, you've got to make sure, you've got to be informed and you've got to display a high practise and professional standards." So when the client's position doesn't make sense, make sure you ask that extra question, "Do your client significant car expenses make sense?" If your client has been primarily working from home, that's a dead giveaway that that's probably not right. And also making sure that you call out bad behaviour in our tax community. It's a small community that we are all part of. It's really important that we're all doing the right thing by this tax community that we're all part of.

So while you're not required to cite taxpayer records, I do encourage tax agents to ask your client to bring their records to your meetings or email them and to continue to have those in-depth conversations with your clients about their circumstances, particularly assessing whether their prior year deductions have changed. So we always say don't just copy and paste, but ultimately it comes down to the code of professional conduct set out by the Tax Practitioner's Board, particularly the items on reasonable care, which is something that we're really focused on. In terms of the common mistakes that we sometimes see taxpayers make, they're things like, as I mentioned before, and I'm sounding like a broken record, it's the record keeping. We do find when people do get audited, the taxpayers don't have those records or have incorrect records to substantiate their claims. It's really important your clients know what records they need to keep. And there are plenty of options for keeping records such as our ATO app where we've got myDeductions tool, and people can make sure that they've got their records there. Nexus is the other issue that we also see.

If the work-related deduction is not directly related to the income your client earns, it can't be claimed as a work-related deduction. And thirdly, make sure you portion work use and don't double dip deductions. So for example, if you're claiming 100% of your mobile phone expenses when it's used for both work and private purposes, that's a no-no. And obviously if you're using the revised fixed-rate rate method, that's already included in the calculation already. That's just something to consider when you're lodging your tax return on behalf of your client using the fixed-rate method this tax time.

Elinor Kasapidis:
That's fantastic. No Netflix deductions, no Tim Tams, and no double dipping, I think is the rule. Thank you for walking us through all of that, Tim. And the purpose is really to get everybody to understand what the changes are. To summarise, the shortcut method is no longer available for the current income year and future income years. The actual cost method remains available and is unchanged. A revised fixed-rate of 67 cents per hour now exists, and the previous 52 cents per hour fixed-rate no longer exists for the current income year and future income years. The revised rate applies from the 1st of July, 2022, which means your 2023 tax return. The revised fixed-rate covers energy, mobile, and home phone, and internet expenses, and stationary and computer consumables. You must keep daily records of the hours worked from home throughout the year in addition to one document for each of the additional running expenses that you incur.

For this 2023 tax year only, under a transitional arrangement, you can use a representative record of hours worked from home until the 28th of February, 2023, but you do need to start keeping a record of all hours worked from home from the 1st of March, 2023. You now claim any other running expenses not covered by the revised fixed-rate and the decline in value of depreciating assets separately. For example, cleaning expenses for a separate home office, home office furniture or IT equipment. If working from home is costing you quite a bit, it may be worth comparing your deductions under both methods to see what is best for you or see a tax agent for advice. With millions of taxpayers looking to claim work from home deductions in their 2023 tax returns, are there any final messages you'd like to share with our listeners today, Tim?

Tim Loh:
Yeah, look, El, we've recently updated our website content with a revised working from home fixed-rate information, so check out our website, ato.gov.au/home. You also find there a new poster about the working from home methods and the records taxpayers need, which might be handy for any tax professionals listening to share with their clients before tax time. We've also recently updated our record keeping poster that's available on our website, ato.gov.au/keeping records. I encourage you to download these products, and if you're a tax agent, send them to your clients. If they start keeping the right records now, it'll make your job and our job easier this tax time.

Elinor Kasapidis:
Excellent, and that brings us to the end of today's podcast. As always, it's a pleasure to have you on. Thank you very much for joining us today, Tim.

Tim Loh:
Thanks, Elinor.

Elinor Kasapidis:
With Interest is a weekly podcast. If you like what you've heard today, why not subscribe on your favourite podcast app? From all of us here at CPA Australia, thank you for listening.

Garreth Hanley:
You've been listening to With Interest, a CPA Australia podcast. If you've enjoyed this episode, help others discover With Interest by leaving us a review and sharing this episode with colleagues, clients, or anyone else interested in the latest finance, business, and accounting news. To find out more about our other podcasts and CPA Australia, check the show notes for this episode.