How you can get hundreds more dollars back at tax time
Millions of employees can boost their tax refund by hundreds of dollars if they resist the easy charms of the Australian Taxation Office's new "shortcut method" for calculating a working from home expense claim during the coronavirus crisis.
Under the shortcut method, a deduction of 80 cents can be claimed for every hour worked from home since March 1.
While its simplicity is attractive, a worker who chooses this option cannot claim anything more for their phone, internet and electricity use.
Nor can they seek a deduction for buying the basics to establish a home office during lockdown, such as a desk, chair and stationery.
An example prepared by tax agents H&R Block for The Daily Telegraph shows a fictional lawyer "Renee" would be about 270 per cent better off by spurning the shortcut method in favour of the "actual cost method".
Renee is able to claim a deduction of more than $1600 based on her actual costs compared to $440 using the shortcut.
Assuming her marginal tax rate is 37 cents in the dollar, the lockdown refund due to Renee is about $600 under the actual cost method versus $163 via the shortcut.
H&R Block tax communications director Mark Chapman encouraged workers to consider using the actual cost method - provided they had evidence to substantiate their deduction.
"If you've got the records to claim your actual costs that is definitely what you should do," Mr Chapman told The Telegraph.
"By and large, you are always going to get the smallest deduction when you use one of these flat rates the ATO sets."
Other experts also said many taxpayers would be better off not using the shortcut method.
"They could be losing out," said Etax Accountants senior tax manager Liz Russell.
Some people would be best served by the old 52c/hour rate that permits additional claims for phone, internet and stationery costs, Ms Russell said.
"It is worth considering," she said.
Still, PwC private clients leader Martina Crowley said it was "really pleasing" the ATO had introduced the new 80c/hour all-inclusive rate because it made claiming simpler for some workers.
"It does help with the challenge of keeping more substantial documentation," Ms Crowley said.
The only evidence required under the shortcut method was a record of hours worked, such as a diary or timesheets, she said.
Etax's Ms Russell recommended anyone who paid their tax quarterly in advance and had seen declines in their income from interest, dividends or rent to get their return in as soon as possible.
"You'll get that money back if your earnings have dropped because you have been paying tax on an income that doesn't exist anymore," she said.
PwC's Ms Crowley said the most likely mistake that taxpayers will make on this year's return will be to assume JobSeeker payments do not have to be declared.
"JobSeeker is taxable," she said. "People should include that in their returns."
H&R Block's Mr Chapman said the other potential pitfall was using last year's numbers for items such as work-related car use and dry-cleaning of uniforms. They should be down by 25 to 30 per cent on 2019 levels due to the pandemic lockdown.
"The ATO will be expecting to see that," Mr Chapman said. "If they aren't, that would cause a flag to be raised."
Financial services employee Johanna O'Leary is one of those taxpayers who will be claiming using the actual costs method this year.
Ms O'Leary has been working from home since returning from maternity leave in April.
"We didn't have a home office set up," she said.
So the family has bought a chair, computer monitor and stationery. The aim is to add a desk before July 1 as well.
Ms O'Leary has kept her receipts, as well as a notebook of hours. She'll transfer that into a spreadsheet then hand it over to H&R Block Broadway and Bondi Junction to crunch the numbers.
"I leave all that stuff to my accountant," she said. "I consider myself quite financially literate, but he's so much better at it."
How actual costs can beat the shortcut method
"Renee" is a lawyer with a practice based in Parramatta. As a result of COVID-19, her office closes on March 23 and her employer tells all staff to work from home for the remainder of the financial year.
She records her working hours by completing daily timesheets which show she did 550 hours during this time.
Renee converted a spare bedroom in her home into a home office. This room was not used for any other private purpose during the period. Based on her house plans, she estimates that the home office accounts for 10 per cent of the total floor area of her home. For her home office she bought a desk, chair, storage cabinet, stationery and cleaning supplies, plus had a heating vent in the spare bedroom repaired. All items were under the $300 limit that allows them to be a total and instant deduction.
Expense claim options
The special "shortcut rate" of 80 cents per hour covers all deductible expenses relating to working from home. Her timesheets will be sufficient substantiation for this claim.
Deduction = $440 (550 hours x 80 cents)
52 cents per hour fixed rate
This is the older method. The rate covers power, gas, cleaning and the decline in value of home office items such as furniture and furnishings. It does not cover other expenses such as computer consumables, stationery, phone and internet expenses, which can be added on.
Renee can claim the 52 cents per hour method in relation to her 550 hours worked from home. Her claim is $286. Plus she can claim:
- Home phone/internet costs - $190 ($380 x 50%, based on her estimate of work use)
- Mobile phone - $293 ($450 x 65%), and
- Stationery - $110
Renee will need to keep her timesheets, receipts and bills. She will need to be able to justify the work use percentages if the ATO asks.
Deduction = $879 ($286 + $190 + $293 + $110).
The third available method is to claim actual costs incurred, including power for lighting and powering items used for work such as a computer, as well as gas for heating, along with the decline in value items such as home office furniture.
It is necessary to keep records and written evidence to determine the work-related proportion of each expenses incurred.
Renee's claim calculation:
- Cost of office desk - $270
- Cost of office chair - $149
- Cost of storage cabinet - $225
- Electricity - $110 ($1,100 x 10%)
- Gas - $27 ($270 x 10%)
- Home phone/internet - $190 ($380 x 50%)
- Mobile phone - $293 ($450 x 65%)
- Cleaning products - $8 ($80 x 10%)
- Stationery - $110
- Repairs - $240
The office desk, chair and cabinet are capital items but as the cost of each item is less than $300, the entire cost can be immediately deducted.
She cannot claim a deduction for the tea, coffee, milk and toilet paper; these items are private and domestic in nature, even though her employer would previously provide these at work.
Deduction = $1622
Source: H&R Block