In The Tax Institute’s TaxVine [No.4, on 17.2.23], their Tax Policy and Advocacy (TPA) team explain the ATO’s position on claiming deductions for working from home (WFH) expenses following the release of Practical Compliance Guideline PCG 2023/1 this week.
The updated guidance replaces draft Practical Compliance Guideline PCG2022/D4 and details the revised fixed rate method (RFRM) for claiming deductions for WFH expenses. Generally, a taxpayer is not able to claim deductions for expenses associated with their home because these are private or domestic in nature and disallowed under subsection 8-1(2) of Income Tax Assessment Act 1997 (ITAA1997). However, certain deductions are allowable where the home is a place of business or is used in connection with the taxpayer’s income-earning activities. This is outlined in Taxation Ruling TR 93/30.
Previous methods for calculating work from home expenses
Prior to 1 July 2022, taxpayers could calculate their WFH expenses using the following methods:
- Previous fixed rate method (PS LA 2001/6) — deductions of a certain rate (52 cents per hour from 1 July 2018 to 30 June 2022 with alternate rates for earlier years) to cover home office running expenses such as lighting, heating, cooling, cleaning costs and decline in value (DIV) of office furnishings. The previous fixed rate method did not include deductions for computer consumables, stationery, phone and internet expenses or DIV of electronic devices.
- Shortcut method (PCG 2020/3) — deductions at a rate of 80 cents per hour to cover all additional running expenses including electricity, DIV of furnishings, cleaning costs, phone and internet expenses, stationeryexpenses, DIV of computers and computer consumables.
- Actual cost method — covers actual expenses incurred while WFH. This approach requires keeping records and written evidence to determine the work-related proportion of actual expenses incurred.
However, from 1 July 2022, the previous fixed rate method and shortcut method will no longer be accepted.
Acceptable method for calculating work from home expenses from 1 July 2022.
PCG 2023/1 provides taxpayers with a choice between the actual cost method and RFRM to calculate their WFH deductions from the 2022–23 income year onwards. Different taxpayers in the same household can individually choose whether to use the revised fixed rate method (RFRM) or actual cost method. A dedicated work area at home is not required.
The running expenses covered by the RFRM are energy expenses, internet expenses, mobile and home phone expenses, and stationery and computer consumables. Not all types must be incurred to use the RFRM. It does not include cleaning costs and DIV of furnishings and furniture which were previously included under the fixed rate method, although the record keeping requirements for these costs are reasonably clear and straightforward to calculate.
Taxpayers can use the RFRM if they meet the following criteria:
- Working from home
- Incurring deductible additional running expenses
- Keeping and retaining relevant records
These criteria are outlined in more detail below.
If these criteria are satisfied, the individual can claim deductions at a rate of 67 cents per hour WFH during the income year and the Commissioner will not allocate additional resources to reviewing the deduction. Taxpayers who do not meet the requirements above will not be able to rely on the RFRM to calculate WFH deductions and must instead use the actual cost method.
The ATO has stated that this rate per hour is based on the Australian Bureau of Statistics (ABS) household expenditure survey with consideration of annual Consumer Price Index (CPI) weightings for the 4 categories of expenses comprising the rate. Given the long-term inflationary cost-of-living pressures facing Australians, we consider it important for the rate to be regularly reviewed. The previous fixed rate method was updated approximately once every four yearsand may be too large a period given the current economic conditions.
Observations
Working from home
Individuals must WFH while carrying out employment duties or carrying on a business on or after 1 July 2022. The work must be substantive and directly related to income-producing activities. It cannot consist of minimal tasks such as taking the occasional call from home.
Incurring ‘additional’ expenses
The PCG states that in order to satisfy the second criterion the taxpayer must ‘incur additional running expenses of the kind outlined in paragraph 23 of this Guideline which are deductible under section 8-1 as a result of WFH.’
We are pleased to see that the PCG has clarified that a comparative exercise is not required to demonstrate that additional running expenses have been incurred as a result of working from home. Records of the hours you worked from home during the income year and invoices or bills in the name of the homeowner or service recipient represent evidence that additional running expenses have been incurred.
Record keeping requirements
Paragraph 56 of PCG 2023/1 states that taxpayers must keep the following in order to rely on the Guideline and use the RFRM:
- records showing the total number of hours you worked from home during the income year; and
- one document (such as an invoice, bill or credit card statement) for each of the additional running expenses which have been incurred in the income year.
These two requirements are discussed in further detail below.
Records of hours worked
The PCG has clarified that records of the total number of hours worked can take any form as long as it is kept contemporaneously. Examples include timesheets, rosters, logs of time spent accessing employer systems or online business systems, time-tracking apps, or a diary or other documents kept contemporaneously.
Estimates for the entire income year or a representative period applied to the rest of the income year will not be accepted, although this was previously allowed under the previous fixed rate method.
Evidence of expenses incurred
Although paragraph 49 of PCG 2023/1 clarifies that taxpayers are not required to incur every running expense listed in paragraph 23 of this Guideline, taxpayers are required to keep records for each type of expense incurred (refer paragraph 56). This means that taxpayers who incur more types of eligible expenses have a larger compliance burden placed upon them than those who incur fewer types of eligible expenses, irrespective of the hours spent WFH.
This larger burden exists because of the requirement for them to keep at least one document for “each” type of eligible expense they incur. On the strict wording of paragraph 63, not having one document for “each” type of expense places them at risk of having their entire claim for WFH under the RFRM disallowed. The Tax Institute is of the view that this is an unfair outcome and leads to potential discrimination or bias against those who incur many types of eligible expenses.
We consider that the requirement should be reduced so all taxpayers are only required to retain at least one form of documentation evidencing that they incurred a loss or outgoing of a kind covered by PCG 2023/1. This would minimise and equalise the compliance burden on all taxpayers while also demonstrating that expenses were incurred when they were WFH.
Transitional record keeping rules
The draft PCG 2022/D4 provided concessional record keeping requirements for the 2022–23 income year. Under the transitional rules, taxpayers only need to keep a record that is representative of the total hours WFH from 1 July 2022 to 31 December 2022. PCG 2023/1 extends the concessional record keeping requirements until 28 February 2023. A record of the total number of actual hours worked from home is only required from 1 March 2023 onwards.
Substantiation of shared costs
The RFRM can be used by multiple people living in the same household if each taxpayer can substantiate their claim in incurring additional running expenses. For example, if the energy bill is not in the taxpayer’s name, a joint credit card statement or lease agreement showing that the expenses are shared will be enough to substantiate the additional expense. However, further information about instances lacking joint statements or lease agreements would provide greater clarity for taxpayers and tax professionals in complying with record keeping requirements. Some of these circumstances that are not addressed by the PCG are further detailed in our submission.
Objection Rights
Taxpayers who object to their assessment in relation to their WFH expenses will not be able to rely on the RFRM as it is an administrative approach and not a statutory provision. Taxpayers wishing to amend their WFH deductions through an objections process must therefore use the actual cost method. This will requiretaxpayers to keep records to show the actual expenses incurred when they were WFH and enough supporting information to demonstrate how the income-producing proportion of the expenses was calculated.
Application to entities other than individuals
PCG 2023/1 has not clarified whether the RFRM can be used by taxpayers receiving business income from alternative arrangements or structures. It simply states that the RFRM can be relied on by taxpayers who WFH in carrying on a business on or after 1 July 2022. We hope to see more guidance released around how the RFRM would apply to partnerships, trusts, companies and attributed personal services income.
Closing comments
We welcome the ATO’s release of PCG 2023/1. It is important that taxpayers and tax professionals are able to have visibility of the changes, noting that record keeping requirements will change from 1 March 2023 onwards. While the RFRM is welcome, it is requiring the Commissioner to apply an administrative solution to address a gap in the legislation. The Tax Institute is of the view that the law should be amended to enable the Commissioner to set a regularly updated WFH rate with simpler record keeping requirements. It is important to us that taxpayer objection rights using the same methodology are properly preserved in the event of a tax dispute.
[Tax Month – February 2023, last month] 21.4.23