ATO releases guidelines for employees claiming deductions for "working from home" expenses due to COVID-19

As a result of the COVID-19 pandemic, scores of employees of Australian corporate entities have been working from home. Whether it be through specially modified and dedicated areas in their house, a shed in the garden or a laptop on the couch, employees working from home has become the new norm for corporate Australia while it works through the COVID-19 pandemic.

Consequently, this has led to many queries from both employers and employees alike as to what expenses an employee can claim for "working from home" expenses (WFH Expenses) in their 2019/2020 tax return.

In response, the Australian Taxation Office (ATO) has released some brief guidelines together with "Practical Compliance Guideline 2020 / 3" (PCG 2020/3) (together the ATO Guidelines) on this issue in respect of employees who work from home as a direct result of COVID-19. There is also existing guidance from the ATO in respect of home office expenses (such as for example, Taxation Ruling 93/30 and Practice Statement Law Administration 2001/6. Separately, a brief summary of the administrative relief measures the ATO (and State revenue authorities) are providing businesses in respect of COVID-19 are set out in our COVID-19 Response.

Of immediate note for employees, the ATO Guidelines set out a new and temporary method (ie. the "Shortcut Method") which the ATO will accept to calculate deductible WFH Expenses (ie. "additional running expenses") for the period from 1 March 2020 until 30 June 2020 (ie. in addition to the existing Fixed Rate Method / Actual Cost Method).

As we anticipate that employers will be fielding queries from their employees on this issue, employers may wish to direct their employees to the various ATO guidance (including the ATO Guidelines) that are available. It is important to emphasise that employees should seek professional advice regarding the application of the ATO guidance and ATO Guidelines to their individual circumstances.

Furthermore, of particular note to employees who are working from home for the first time and considering claiming deductions for WFH Expenses, there are special rules in the income tax legislation which can impact the full application of the "capital gains tax" exemption for the disposal of main residences in circumstances where the main residence being sold has been used for the purpose of gaining or producing assessable income during the period of ownership (also see paragraph 36 of Taxation Ruling 93/30). If employees envisage that these provisions may impact them then they should seek professional advice.

ATO Guidelines

In summary, the ATO Guidelines:

1. provide that the ATO will accept three calculation methods to calculate deductible WFH Expenses for the period from 1 March 2020 until 30 June 2020 (ie. the new Shortcut Method and the existing Fixed Rate Method / Actual Cost Method). A brief summary of these calculation methods is set out below;
2. emphasise that as a threshold issue, the following criteria must be satisfied by a taxpayer to claim a deduction for WFH Expenses:
   • the taxpayer must have incurred the WFH Expense (ie. they spent the money in respect of the WFH Expense and were not reimbursed by their employer);
   • the WFH Expense must be substantive and directly related to earning the taxpayer’s income; and
   • the taxpayer must hold appropriate record(s) to substantiate the WFH Expense;
3. list examples of expenses incurred by taxpayers solely working from home due to COVID-19 that taxpayers can and cannot claim (see table below). As the Shortcut Method effectively calculates the deductible WFH Expenses based on the hours of work from home, a taxpayer does not have to incur all the expenses listed by the ATO – rather, the taxpayer must have incurred additional expenses in some of these categories as a result of working from home due to COVID-19.

Further, in recognition of the practical reality that many taxpayers will be working from home for the first time and potentially in limited space such as apartments, the ATO Guidelines acknowledge that a taxpayer does not have to have a separate or dedicated area of their home set aside for working in order to claim deductions for WFH Expenses (although PCG 2020/3 states that a dedicated area may make it easier to show that WFH Expenses have been incurred). Practically therefore, provided that the above mentioned criteria is satisfied, an employee will generally be able to claim a deduction in respect of WFH Expenses while they work from home, even if the work is for example, predominantly carried out on a couch or other makeshift or transient area within their house.

New temporary "Shortcut Method" for period between 1 March 2020 to 30 June 2020

In essence, under the Shortcut Method a taxpayer can claim a flat rate of 80 cents per work hour for all deductible WFH Expenses for the period from 1 March 2020 until 30 June 2020. The ATO has indicated that they will review an extension of the Shortcut Method (and PCG 2020/3) beyond 30 June 2020 depending on the status of COVID-19 at that time.

For illustrative purposes, if an employee works from home for 300 hours during the period from 1 March 2020 until 30 June 2020 and elects to use the Shortcut Method, then it can claim deductions of $240 in respect of WFH Expenses (ie. 300 hours x $0.80).

While the ATO has stated that this new calculation method is intended to make it easier for taxpayers to claim deductions for WFH Expenses (ie. as it has reduced record keeping requirements than the other two calculation methods), taxpayers should carefully consider whether this method is appropriate for their individual circumstances (and seek professional advice as relevant).

Further:

• if a taxpayer opts to use the Shortcut Method, then:
  • their 2019/2020 tax return must include the notation "COVID-hourly rate" next to their deduction for home office expenses; and
  • they must retain a record of the hours they worked from home as a result of COVID-19 (ie. which may include timesheets / diary notes / rosters). The taxpayer is not required to retain any other records such as receipts etc.; and
• the Shortcut Method cannot be used to calculate deductible WFH Expenses for any period prior to 1 March 2020 (and the Fixed Rate Method / Actual Cost Method must be used for those periods).

Existing calculations methods

Separate to the Shortcut Method, a taxpayer can also opt to use any of the following existing methods to calculate deductible WFH Expenses for the period from 1 March 2020 until 30 June 2020 (and these existing methods must be used for any deductible WFH Expenses prior to 1 March 2020):

1. Fixed Rate Method – a taxpayer can claim the following:
   • a rate of 52 cents per work hour for heating / cooling / lighting / cleaning and the decline in value of office furniture;
   • the work related portion of the taxpayer’s actual costs of expenses related to phone / interest / computer consumables / stationery; and
   • the work-related portion of the decline in value of a computer / laptop / similar device;
2. Actual Cost Method – a taxpayer can claim the actual work related portion of all their "additional running expenses" (ie. which need to be calculated on a "reasonable basis").

If a taxpayer opts to use any of these existing calculation methods, then the taxpayer must keep a record of the number of hours worked from home along with suitable records of the expenses such as receipts etc. (ie. examples of such records are set out here and in the Practice Statement Law Administration 2005/7.