Working From Home – All You Need To Know To Claim Your Maximum Deduction

Coronavirus has forced a lot of workers whom either never worked from home or only did a few hours of work from home to now be working full time at home.  This does mean increased costs to employees and business owners as a consequence of working from home.  Here’s what you need to know to maximise your tax deduction, we will split it up as it applies to employees and business owners.

Employees

You may be able to claim Running expenses, Occupancy expenses, Phone and internet expenses, Decline in Value of Computer and Tech Items and Decline in Value of Office Furniture.

There are three ways to determine which of these expenses you can claim:

1. Home is your principal place of work and you have a dedicated work area that is unlikely to be suitable for domestic use.

2. Home is not your principal place of work but you have a dedicated work area – for example a study.

3. You work at home but you don’t have a dedicated work area – for example, you use a room with a dual purpose such as a lounge room.

The Table below summarises what expenses you may be able to claim for each of the three situations mentioned above.

Running expenses

If you work from home, you can claim the work-related proportion of your running expenses. These include:

·         heating, cooling, and lighting

·         the costs of repairs to your home office equipment, furniture and furnishings

·         cleaning costs

·         other running expenses including computer consumables (for example, printer paper and ink) and stationery.

·         Only the additional running expenses you incur as a result of working from home are deductible

Calculating running expenses

There are two ways to calculate your running expenses:

1.       you can claim a fixed rate of 52 cents per hour

2.      you can calculate your actual expenses.

1. Fixed rate

You can claim a deduction of 52 cents for each hour you work from home instead of recording all of your actual expenses for heating, cooling, lighting, cleaning and the decline in value of furniture.

This rate is based on average energy costs and the value of common furniture items used in home business areas.

To claim using this method, keep records of either:

–          your actual hours spent working at home for the year

–          a diary for a representative four-week period to show your usual pattern of working at home.

You can then apply the four-week representative period across the remainder of the year to determine your full deduction amount. However, if your work pattern changes you will need to create a new record.

You need to separately work out all other home work area expenses, such as phone and internet expenses, computer consumables and stationery, decline in value on computers or other equipment.

 NOTE: The ATO has announcement a new shortcut method for those who are only working at home due to the coronavirus. Check out our blog article about it here: https://cocomoadvisory.com.au/working-from-home-all-you-need-to-know-to-claim-your-maximum-deduction/

2. Actual expenses

If you have a dedicated work area, you can claim additional running costs and the decline in value of office furniture used in the area for work purposes.

To calculate actual expenses for your dedicated work area, you can:

–          keep a record of the number of actual hours you work from home during the income year

–          keep a diary for a representative four-week period to show your usual pattern of working at home

–          work out the decline in value of depreciating assets and

o   keep receipts showing the amount you spent on the assets

o   work out the percentage of the year you used those depreciating assets exclusively for work  you can claim a deduction for the proportion of the decline in value that reflects your work-related use of the depreciating assets

–          work out the cost of your cleaning expenses by adding together your receipts and multiply it by the floor area of your dedicated work area (floor area of the dedicated work area divided by the whole area of the house as a percentage) – your claim should be apportioned for any

o   private use of your home office

o   use of the home office by other family members

–          work out the cost of your heating, cooling and lighting by working out the following

o   the cost per unit of power used – refer to your utility bill for this information

o   the average units used per hour – this is the power consumption per kilowatt hour for each appliance, equipment or light used

o   the total annual hours used for work-related purposes – refer to your record of hours worked or your diary for this information.

You must also take into account if any other members of your household use the home office and, if so, apportion your expenses accordingly.

If you don’t have a dedicated work area, you should work out the actual cost of your heating, cooling and electricity expenses. You can do this by working out the cost of running each unit you used per hour and multiplying that by the hours you worked from home. The amount of the additional expense is generally small, especially if there are other people using the area at the same time you are working. In those circumstances, there is no additional cost for lighting, heating or cooling.

Decline in Value

home office equipment including computers, printers, telephones and furniture and furnishings. You can claim the

–          full cost for items up to $300

–          decline in value for items over $300

To claim a deduction for an asset that cost $300 or more, you need to calculate the decline in value for both the period you:

–          owned the assets during the income year

–          used the assets for work-related purposes.

You can use the depreciation and capital allowances tool to calculate your deduction for the decline in value of equipment, furniture and furnishings that cost more than $300, use the depreciation and capital allowances tool to work this out.

Occupancy expenses

Employees are generally not able to claim occupancy expenses. Occupancy expenses include:

–          Rent

–          mortgage interest

–          property insurance

–          land taxes

–          rates.

You can only claim the work-related proportion of your occupancy expenses in two very limited circumstances where:

–          the space in the home is a place of business, and not suitable for domestic use – for example, a doctor or dentist surgery or a hairdresser studio in the home

–          no other work location is provided to an employee by an employer and the employee is required to dedicate part of their home to their employer’s business as an office – you can claim the portion of these costs that relate to a clearly identified place of business.

If you claim occupancy expenses, you don’t qualify for the capital gains tax (CGT) main residence exemption for the part of your home that you use for work. If you use your home as a place of business there may be CGT implications when you sell it.

Calculating occupancy expenses

If you are eligible to claim occupancy expenses, you can work them out by calculating the:

Total expenses × floor area × percentage of year that part of your home was used exclusively for work

If the area you use for work takes up 15% of your home and you used it for work for the whole of the year, you can claim 15% of your occupancy expenses.

Phone and internet expenses

You can claim a deduction for the work-related proportion of your phone and internet expenses. You must have paid for these costs and have records to support your claims.

There are two ways to calculate your phone and internet expenses:

1.       you can claim up to $50 with limited documents

2.      you can calculate your actual expenses.

You need to keep records for a four-week representative period in each income year to claim a deduction of more than $50. These records include phone and internet bills.

1. Claim up to $50

If your work use is incidental and you are not claiming a deduction of more than $50 in total, you may make a claim based on the following, without having to analyse your bills. The rates you can use to work out the cost for your work calls are:

–          25 cents for calls made from your landline

–          75 cents for calls made from your mobile

–          10 cents for text messages sent from your mobile.

2. Actual expenses

If you have a phone or internet plan where you received an itemised bill, you need to determine your percentage of work use over a four-week representative period. You can then apply this to the full year.

You need to work out the percentage using a reasonable basis. This could include:

–          the number of work calls made as a percentage of total calls

–          the amount of time spent on work calls as a percentage of your total calls

–          the time you spent, or data used for work purposes compared to your private usage and that of all members of your household.

If you have a bundled plan, you need to:

–          apportion the cost of the plan between the services provided

–          identify your work use for each service over a four-week representative period during the income year, which can then be applied to the whole year.

The same method should be used for non-itemised plans.

Records you must keep

If you’re an employee who works from home, you must keep records such as:

–          diary entries for a representative four-week period to show your usual pattern of working at home that show

you worked from home and made work-related phone calls

how you work out how much you used your equipment, home office and phone for work purposes over a representative four-week period

–          receipts or other written evidence, including for depreciating assets you have purchased

–          diary entries to record your small expenses ($10 or less) totalling no more than $200, or expenses for which you can’t get any kind of evidence

–          itemised phone and internet accounts (paper or electronic) from where you can identify work-related calls and internet use, or other written records, such as diary entries if you don’t get an itemised bill.

If you use the four-week representative period to calculate your usage over the income year and your usual pattern of work changes, you will need to keep separate records to show your usage.

For example, if you usually work from home one day a week and due to an emergency situation such as COVID-19, bush fire or drought you’re required to work from home for an extended period, you will need to keep records for both:

–          the actual hours you’ve worked from home due to the emergency situation

–          your usual working from home arrangements.

Your four-week representative period will no longer be valid in these circumstances.

Business Owners

Running your business from home

The information in this section applies where your home is also your principal place of business – that is, you run your business from home, and a room is set aside exclusively for business activities. Examples include:

–          a small business operator whose main office is in their home

–          a tradesperson or craftsperson who has their workshop at home

–          a doctor or dentist who has their surgery or consulting room at home.

If you do only some business or work from home, in either a designated work area or another part of your home, refer instead to Working from home.

Deductions you can claim

Where your home is also your place of business, you can claim deductions if you carry out income-producing work at home and incur expenses in using your home for that purpose.

You can claim a deduction for the following:

–          the cost of using a room’s utilities, such as gas and electricity – which must be apportioned between business and private use, based on actual usage

–          business phone costs – if a telephone is used exclusively for business, you can claim for the rental and calls, but not the installation costs. If the telephone is used for both business and private calls, you can claim a deduction for business calls

–          decline in value (depreciation) of office plant and equipment, such as desks, chairs, computers. If equipment such as a computer is also used for non-business purposes, your claim must be apportioned between business and private use

–          decline in value (depreciation) of curtains, carpets and light fittings

–          occupancy expenses (such as rent, mortgage interest, insurance, rates). You can claim the portion of these costs that relates to the room or workshop you use as a place of business. A common method of working out how much to claim is the floor area (as a proportion of the floor area in your whole home).

If your employer has an office in the city or town where you live, your home office will not be a place of business, even if your work requires you to work outside normal business hours.

If your income includes personal services income (PSI), you may not be able to claim a deduction for occupancy expenses.

Capital gains and the main residence exemption

Generally, you can ignore a capital gain or loss you make when you sell your home or main residence (under the main residence exemption).

However, you don’t get the full main residence exemption if your home is your principal place of business, although you’re probably entitled to a partial exemption.

To work out the capital gain that is not exempt, you need to take into account a number of factors including:

–          proportion of the floor area of your home that is set aside to produce income

–          period you use it for this purpose

–          whether you’re eligible for the ‘absence’ rule (see Treating a dwelling as your main residence after you move out)

–          whether it was first used to produce income after 20 August 1996.

If you first used your home as your place of business after 20 August 1996, the period before you first used your home to produce income is not taken into account in working out the amount of any capital gain or capital loss. Instead, you use the market value of your home at the time you first used it to produce income.

It’s a good idea to get a valuation of your home at the time you first use it as your place of business, so that when you come to sell it you don’t pay more capital gains tax than necessary.

Sources: www.ato.gov.au

The Importance of Business Budgeting

Does your business have a budget? Does it have plenty of forward planning and research on its side? Because without a budget in place, there’s a good chance it doesn’t. After all, business budgeting is very important to the modern business day and age. A budget does a lot for an organisation in the here and now, and it does a lot for that organisation’s future.  

If you’re a small business owner, a budget is always going to work out in your favour. It’s going to help you outline your goals, and work towards them in a cost-effective and efficient manner. It should be a feature of your initial business plan and should help lay the foundation of your future business operations.

Budgeting is only going to become an increasingly important need as your business gets bigger and bigger, and thus, the groundwork for an efficient and working system should be set right now. If you’re not sure why a budget outline is so crucial, and why you can’t just come up with a budget idea on the spot, hopefully, we can shed a little more light on the subject for you.

All in all, every business should be working with a budget, and there are many reasons why; let’s delve into some of the main details surrounding why below. If you need to put a business budget together, make sure you use these points as a driving force behind your actions.

A Business Budget is a Long Term Plan

As mentioned above, a business budget is very much a plan for the future. It keeps your spending on the straight and narrow in the moment, but it also ensures you’re keeping an eye on the future of your business too. When you set out your business goals, a budget helps to plan expenses for them, including determining the highest priority spending, and where caps should be placed.

A budget needs to be relevant to the business it serves, and the fact that budgets can be versatile and flexible helps to make business budgets so important. A budget is there to help you bolster your yearly efforts, and every single business out there makes a different amount of money at various points of the year. Indeed, depending on the type of business you own, your budget planning needs to be a little different. For a company that offers products all the year round, planning is more relaxed, compared to a company that generates most of their annual revenue via summer or winter sales.

This long term planning ensures you have plenty of savings, and that you don’t overspend on your assets before you have the chance to expand them, and it ensures your business has plenty of value to work with.

A Business Budget Helps with Your Market Research

Market research is one of the main things that needs to be conducted in the run up to establishing a business, and once again, using a budget plan can help your business to put any research it comes up with to good use. It’s hard to apply generalised market research to a business that’s never operated before, or hasn’t come into contact with the very people it aims to serve, and so, the budget acts as both a guideline and a forecast.

Market research is conducted via its own means, but the budget will always be in the background for you to refer to. Why? Because a budget ensures you have the right time frame to work with, in terms of researching the market at the right time of year for your business, and also to ensure you’re never consuming too many resources on a month by month basis whilst doing so – this is where the long term budget works hand in hand with the forecast sheets you can prepare alongside it.

Similarly, it details how, where and when you can put this market research to good use within your business. It details if you’ve got the money to do so, in what departments you would need to obtain more, etc. All in all, the budget is there to back up your market research.

A Business Budget Can Help You to Evaluate

One of the main purposes of an annual or quarterly budget is to help you evaluate just how well you’re working, and for most businesses, this is what the budget will be referred to for the most. Evaluation is a necessary part of running a business, and it could very well be seen as the budget’s most important job.

At the end of each financial year, the budget serves to prove what went well, and what could be done better. It’s why keeping a proper track of both the incoming and outgoings is key – you cannot afford to miss out on creating a system like this, to ensure you’re moving into the next year with the right resources at hand.

And if it turns out you have spare or extra funds to work with, the budget frame will help you to allocate these out as well. Let’s look at a couple of examples: If you have debt, you can take a look at the outstanding balance, and just how long it’ll take to pay the whole amount off. If you’re working with a lack of savings, or there’s no insurance in place in case of illness or disaster, the budget will once again highlight this.

A Business Budget Ensures You Have the Manpower

The staffing within a business is going to cost the owner a lot of money on a yearly basis. Payroll is a big deal, but it’s a necessary one, and rarely do people find success on their own merit. So, ensuring that the budget takes into account just how many people you’re going to need to help balance the books, as well as run the day to day operations, is one of the first things to consider when writing one up.

Because a budget ensures that you’re hiring as and when you need to, and that you’re hiring people with the right pay brackets for your business. It ensures you can offer out promotions and pay rises where they’re deserved, and it also helps to indicate whether or not someone on your team is pulling their weight. All in all, your business’ budget not only details the financial wellbeing of your company, but it also shows you where and how you can make it healthier.

Thankfully, reaching out for financial aid is not hard, especially when you’ve got a detailed budget plan to show a professional. Accountants, bookkeepers, and BAS agents can be easily contacted by the government website, or you could visit the ASIC website to find a financial counselor.

A Business Budget Helps You To Cut Expenses

How often do you look back on quarterly reports and wish you had gone into a little more detail on the expenses side of things? Because a budget for your business could be the best way to pad out the cost efficiency reports that keep an eye on just how much money is going out of your business, compared to what’s coming in. A detailed and lengthy budget plan ensures you can make the hard decisions, depending on how much you’re spending on an annual basis, and how you can cut costs or find shortcuts around them.

Not to mention, new businesses often struggle in the face of handling the almighty expenses of trying to set up in the modern-day and age, and they do not help themselves when it comes to impressing a potential source of revenue.

A business budget ensures that anyone interested in your business, either a loan company, buyer, or venture capitalist investor has the details necessary to prove that you are a safe decision in terms of cash flow. Once again, it’s thinking in the long term that helps to prove your business has a future, and that the budget you’re working with has a good track record in the face of potentially overwhelming costs.

The Importance of Business Budgeting

So, how well is your business budget working out for you? If you don’t have one, it’s time to put one together. If you do have one, thank yourself for having the forethought for putting one together as part of your original business plan. Plus, take the time now to take it back to the drawing board, to reevaluate how well it’s working for you, and take the chance to have a look at how it’s forecasting your future.

All in all, a business budget incorporates a lot of elements. It ensures you have the fees in place to pay your bills, and shows you if and where you’re spending too much or too little. A business budget has the distributing power you need in the modern-day and age, especially as a small business that has a lot of competition to run up against. Business budgeting can always help.

Key Opportunities 2021-22 Federal Budget

With the End of Financial Year for 2021 approaching and the Federal Budget handed down last month, here are the key points to take away for Business.

Extension of Full Expensing of Assets

Eligible businesses with an aggregated turnover of less than $5 Billion can fully deduct the cost of eligible depreciating assets through to 30 June 2023. This is mainly due to supply chain issues being experienced where orders have been placed by businesses, but they were not going to receive the assets in time for the old cut off.
This usually signals businesses and owners to go out and buy assets such as new Motor Vehicles for the tax deduction. Before we go off and purchase assets we need to see if the business case stacks up. You need to ask:
Can the Business afford it?
Is it going to add revenue or value to the Business?
Generally purchasing a new motor vehicle isn’t going to add revenue or value unless you are replacing old vehicles that were required to be replaced to function fully. Now if there is a piece of equipment that will increase revenue or increase efficient for the business, then that is going to add value. The secondary benefit under the Full Expensing of Assets is being able to deduct the total cost of the asset in full.
For Example:
Our tax planning for the 2021 Financial Year indicates we are going to make a profit of $100,000. There is a piece of equipment that will add value to the business available for $100,000. We determine that the business can afford to purchase it. Under the Full Expensing of Assets, we can deduct the full $100,000 in this financial year, thus reducing our profit to nil. If we assume our tax rate is 25% then we were expecting to pay $25,000 in tax on the $100,000 profit. We can now use the tax saved as a part of financing the new equipment purchase as well.

Carry Loss Back Extension

Eligible Companies with an aggregated turnover of less than $5 Billion can now carry losses back from up to the 2023 Financial Year as far back as the 2019 Financial Year. What this means is we can take a tax loss this year and carry that back against the 2019 Financial Year where we did make a profit and paid tax.
Example:
2019 Financial Year – $100,000 Taxable Profit with $30,000 Tax Paid
2021 Financial Year – $100,000 Taxable Loss
We can carry the $100,000 loss against the 2019 Profit of $100,000 and receive the $30,000 back as a tax refund.
So instead of having to make profit in future years and then offset your losses, you can do this now and get the tax paid as a refund.
This can go hand in hand with the Full Expensing of Assets where purchasing assets and full deducting them to create tax losses in the current year. Then the tax refund from the carry loss back can be used to fund the new asset purchases.
A point to note, if you had paid out Dividends which reduced the Franking Account (Tax Paid) to nil then you cannot get the tax refunded. So you will need to confirm that you will receive the tax refund if you plan on using it to fund the asset purchases.

Personal Income Tax Cuts

The Low and Middle Income Tax Offset that applies to the 2021 Financial Year has now been extended to the 2022 Financial Year.
What this means for Wage Earners, Partnerships, Trusts who is being personally taxed, up to $126,000 you will benefit. The Table below shows what offset you will receive at different income levels:

Taxable income	Offset
$37,000 or less	$255
Between $37,001 and $48,000	$255 plus 7.5 cents for every dollar above $37,000, up to a maximum of $1,080
Between $48,001 and $90,000	$1,080
Between $90,001 and $126,000	$1,080 minus 3 cents for every dollar of the amount above $90,000

It is now that business owners should be looking into whether their business can benefit from any of these measures for the 2021 Financial Year.
If you have any questions or queries about your Year End Tax Planning please contact us.