Work from Home (WFH) Tax Deductions

In 1993, the ATO released what is still its most important ruling on home office expenses, TR 93/30. This is a “public ruling” and therefore has a legal status under the Taxation Administration Act as compared to website guidance and practical compliance guidelines which do not have such status.

The ruling commences by stating that, as a general rule, expenses associated with a taxpayer’s home are of a private or domestic nature. However, there is an exception to this general rule if the home is used for income producing activities and has the character of a “place of business”. When this is the case, expenses of occupancy can be partly deductible. Expenses of occupancy include rent, interest, repairs, house and contents insurance, rates and property taxes.

The ruling states that there is a second exception to the general rule. This is when the taxpayer’s income earning activities result in the use of the home as not a place of business. In this case there is a more limited range of deductions available. These deductions relate to “running expenses” of the home. These include heating, cooling, lighting, cleaning, depreciation and repair expenses.

Place of business

The ruling states that there is likely to be an area of a home that is a place of business where (for example) there is part of a residence that is set aside exclusively for the carrying on of a business by a self-employed person. Another example is where part of the home is used as a taxpayer’s sole base of operations for income producing activities (e.g. where no other work location is provided to an employee by an employer). The ruling lists these factors as possible indicators that there is a place of business:

• The area is clearly identifiable as a place of business;
• The area is not readily suitable or adaptable for use for private or domestic purposes in association with the home generally;
• The area is used exclusively or almost exclusively for carrying on a business; or
• The area is used regularly for visits of clients or customers.

Another way in which courts or tribunals have considered that a taxpayer has a place of business at home is where there is an absence of an alternative place for conducting income producing activities. That is a person is (in a sense) “forced” to work at home because there is no other place for them to undertake the work. This can apply in respect of an employee. Put another way, the work area at home has not been set up “as a matter of convenience”.

Where there is a place of business, some part of both the occupancy and running expenses will be claimable as a deduction and an apportionment method must be applied to calculate what amount is deductible.

With regard to occupancy expenses, the apportionment method that should be used “in most cases” is nominated as the percentage of floor area of the home office as compared to the rest of the house. In addition, if the area in the home is a place of business for part of the year, a time basis should also be applied.

Area is not a place of business

Where an area of a home is simply used in connection with income producing activities, but does not have the character of a place of business, only running expenses can be claimed as a deduction. The courts and tribunals have referred to this type of home office as existing “merely as a matter of convenience”. The amount that is allowable as a deduction is the additional expenses incurred as result of the income producing activities.

TR 93/30 states that deductions can be claimed for such areas where the facilities are provided exclusively for the taxpayer’s benefit while he or she works. It is not mandatory that the area be set aside exclusively for work. However, when the area is being used, if the taxpayer wants to claim a tax deduction, no one else can be present in the area. That is, the taxpayer is exclusively using the area for work.

The ruling states that the claiming of lighting, heating (and presumably cooling) expenses is “different to most other home office expenses”. Accordingly, the ruling provides a formula to calculate the deduction for an appliance. That is, the ATO seems to expect that this calculation will be made for each applicable heating, cooling and light generating appliance in a home.

The ruling provides this “appropriate formula” for calculating the additional expense for an appliance:

The cost per unit of power used X the average units used per hour X the total annual hours used for income producing purposes.

To be clear, this calculation is supposed to be undertaken for each appliance that consumes energy. Nothing is said in the ruling about how the annual hours of income producing use of the appliance is determined or recorded. There is no mention of whether an estimate of these hours is acceptable.

Most people would consider what is required by these formulas is impractical. Who can possibly follow what this formula requires for each appliance? Perhaps because the ATO recognises the difficulties in following the formula it states in paragraph 25 of the ruling:

“Generally speaking however, the quantum of any allowable deduction for the additional expense will be small. Accordingly, a bona fide estimate based on a reasonable percentage of the household annual fuel bill will be acceptable.”

Note that the ATO is of the opinion that the additional running expenses will be “small”. It is to be appreciated that this statement was made in 1993. 30 years later, following the working from home revolution that was instigated by COVID-19, that idea has to be questioned. Further, as we are all aware, energy prices are a good deal higher now when compared to 1993.