Proposed new method for calculating work from home expenses

Taxpayers could soon be dealing with more paperwork at tax time, or facing the prospect of a lower deduction for work from home (WFH) expenses. The ATO has recently proposed a new revised fixed rate method of calculating WFH expenses for the purposes of claiming a tax deduction from 1 July 2022. The proposed new rate of 67c per hour would replace the previous shortcut method of 80c per hour (which many taxpayers have been using during the COVID-19 pandemic) as well as the previous fixed rate method. It’s important to note that this proposal is still in the draft stage, and open to submissions from interested parties.

Prior to 1 July 2022, people working from home were able to use one of three methods for calculating a deduction for expenses incurred as a result of working from home:

• the actual costs method, which involved calculating the actual expenses incurred as a result of working from home;
• the fixed rate method, which allowed 52c per hour for each hour a taxpayer worked from their home office, to cover their electricity and gas expenses, home office cleaning expenses, and the decline in value of furniture and furnishings. In addition, a separate deduction for the taxpayer’s work-related internet expenses, mobile and home telephone expenses, stationery and computer consumables and the decline in value of a computer/laptop could be claimed; and
• the shortcut method, which was introduced during the COVID-19 pandemic to make it easier for the large proportion of employees suddenly finding themselves undertaking WFH. This method allowed taxpayers to claim 80c per hour for each hour that they worked from home and covered all expenses such as phone, internet, decline in value of equipment and furniture, electricity, gas, lighting, and so on.

From 1 July 2022, taxpayers can no longer use the shortcut method of 80c per hour, and the ATO has now revised the fixed rate method. According to the ATO, the revised fixed rate method apportions additional running expenses “on a fair and reasonable basis by using a fixed rate of 67c per hour”. Not only is this rate lower than the 80c per hour used by the shortcut method, but it is also proposed to include energy expenses (electricity and gas), internet, mobile, telephone, stationery, and computer consumables, some of which could have been claimed as a separate deduction under the previous fixed rate method.

The work-related decline in value of any depreciating assets could continue to be claimed as a separate deduction under the proposed fixed rate method, as could other running expenses not specifically outlined. Therefore to calculate the total deduction under this new revised fixed rate method, taxpayers will need to calculate the number of hours worked from home during the income year, and multiply that by 67c per hour. To that figure, the decline in value of depreciating assets and other running expenses which are not included in the 67c base rate can be added, giving a final deduction amount.

Given the continual increase in energy bills and other inflationary pressures, this new proposed fixed rate method is likely to yield consistently lower deductions than if the actual cost method was used. Coupled with the abolition of the shortcut method, this means that taxpayers will either have to accept a lower WFH deduction in the coming years or deal with increased paperwork to be able to claim WFH deductions under the actual costs method.

Considering the proposal

Draft Practical Compliance Guideline PCG 2022/D4 Claiming a deduction for additional running expenses incurred while working from home – ATO compliance approach was released on 2 November 2022. Practical compliance guidelines do have value and a clear place within the ATO’s broader tax compliance framework, particularly in the more factually “grey” areas like transfer pricing, where the precise application of the law can be ambiguous.

However, there are concerns that Draft PCG 2022/D4 may miss the mark in its attempt to simplify matters and provide certainty at the small end of town. Given that the Commissioner of Taxation can only administer – not make – the law, and practical compliance guidelines are just a tool in the ATO’s compliance armoury, the best apparent solution is to simplify personal work-related deductions in our tax legislation.

The proposed method doesn’t simplify things much

To rely on Draft PCG 2022/D4, taxpayers must keep records showing the total number of hours they worked from home during the income year (estimates will not be accepted – only a total record of hours) and one document (eg an invoice) for each additional running expense incurred during the year.

If they also claim a deduction for the decline in value of depreciating assets, they must keep documents that meet the requirements of Div 900 of the Income Tax Assessment Act 1997 (employees) or s 262A of the Income Tax Assessment Act 1936 (those carrying on a business), and records that demonstrate their income-producing use of these depreciating assets.

While this is somewhat less than what would be required if they were to claim their actual additional expenses, the main thing the Draft PCG seems to simplify is what proportion of these costs may be claimed – which is contentious to some to argue it is too low.

The proposed method provides limited protection

The simplified method does not exist in the tax laws. As with all practical compliance guidelines, the ATO is really just promising to not look into these matters in certain circumstances, but is not barred from doing so if an investigation is separately commenced.
If this occurs and the Commissioner and taxpayer disagree about the deductions that many be claimed, the simplified method cannot be relied upon by the taxpayer and they will only be permitted to claim deductions in strict compliance with the law. Relevantly, Draft PCG 2022/D4 provides (emphasis added):

Irrespective of paragraph 5 of this Guideline, if you lodge an objection in relation to your working from home expenses for whatever reason, you cannot rely on this Guideline using the revised fixed-rate method to determine whether you are entitled to a deduction for your expenses. Only the actual expenses you incurred as a result of working from home and for which you have adequate records will be allowed as a deduction.

This is the same way objections regarding working from home expenses calculated using the shortcut method and the fixed-rate method are, and have been, dealt with by the Commissioner.

This is legally correct, but by publishing these practical compliance guidelines and pushing them out to taxpayers, it is arguable that the ATO is effectively seeking to have its cake and eat it too. It gains a flexible policy tool to shepherd taxpayers toward particular modes of compliance, but when push comes to shove, the ATO can disclaim any reliance upon it.

The language used in Draft PCG 2022/D4 is therefore concerning and arguably undermines the reliability of practical compliance guidelines as a tool to provide taxpayers with certainty and comfort that their tax affairs are in order and free from scrutiny.

Are taxpayers being set up to fail?

ATO web guidance in most instances conveys to taxpayers that the simplified method may be relied upon absolutely, with no suggestion that taxpayers may be required to adopt a completely different method if the ATO reviews their affairs. And how many ordinary taxpayers do you think will read Draft PCG 2022/D4 (or the final version), or have ever heard of a practical compliance guideline?

This speaks to a lack of clarity in the reliability of this simplified deduction method and the use of practical compliance guidelines.

Taxpayers and advisors should be wary of overreliance on the relief promised in Draft PCG 2022/D4. Comments on the draft are due by 30 November 2022 and it will be interesting to see what, if any, changes there are in the final version.

Source: www.ato.gov.au/law/view/view.htm?docid=%22DPC%2FPCG2022D4%2FNAT%2FATO%2F00001%22