Are these work from home expenses actually work related deductions?
There are numerous items that can be deducted as a work related expense. And though the relevant legislation has not materially changed in recent memory, there continues to be many cases dealing with claims for work related expenses, particularly regarding home offices.
Courts and the ATO look at whether a loss or outgoing is “incidental and relevant” to the taxpayer’s income-producing purpose and whether it has the “essential character” of an income-producing expense.
Employees who conduct some or all of their income-producing activities from home are generally entitled to deduct a portion of the household running costs. Expenditure in the nature of occupancy costs (e.g. mortgage interest or rent) is not deductible unless the taxpayer can establish that a specific part of the home is set aside as a business area and that it is accepted as such by the public generally. Accordingly, employees generally cannot claim occupancy expenses such as rent, mortgage interest and council rates.
In the 1972 case Thomas v FCT, the High Court found that a barrister was not entitled to deduct a portion of the mortgage interest paid on a loan to finance the addition of three rooms to his residence, one of which was used as a home office. It was considered that the barrister’s home could not be regarded as business premises because he had city chambers. The home did not lose its domestic character merely because, like many professionals, he did some work at home.
The exponential advancements in digital technology now allow many employees to conduct larger portions, if not all, of their work effectively from home and may provide employees another way to link their home office activities to their employment activities. There have been 2 recent cases that have dealt with these matters.
The first related to Hall, an ABC employee whose role comprised of two parts. One was a digital role to produce the ABC Sports Digital Radio station, while the live role was produce ABC live sports broadcasts. As a result of Covid-era and employee restrictions, Hall conducted his digital role; which comprised approximately 75% of his total work time, from his rented apartment, and conducted his live role from the ABC’s studio.
Hall had moved to Melbourne for the role and knew he would have to work from home for the digital role. For that reason he rented a two bedroom apartment, the second of which he used for the digital role.
Hall claimed deductions of $5,900 for occupancy expenses and $1,150 for car expenses in his 2021 tax return, which the ATO disallowed.
At both the Administrative Review Tribunal and the Federal Court, Hall’s claim for deductions were allowed in full. This was prima facie on the arguments that the rent could be considered as two expenses, where one was additional expenditure for the use of the second bedroom, and that he was “at work” while travelling from his home to the ABC studio.
However the Full Federal Court considered this approach was incorrect. It found that while Hall was using the second bedroom for income producing purposes and not just out of convenience, the character of the expense was rent paid to secure Hall’s private accommodation. Therefore the rent was private or domestic in nature and not deductible, regardless of whether Hall was required to work from home by the ABC.
With regards to Hall’s car expenses, the Court found them to be non deductible due to his two distinct roles, which meant he was actually travelling to perform work at his live role, not travelling while performing work.
The second case related to Hartley, who worked at Ericsson. He argued that his role required him to be a “thought leader” and “innovator”. He set up an “IT lab” in his home that he claimed allowed him to conduct research, develop projects, conduct blogging for the betterment of Ericsson and his professional profile, and undertake self-education. The total deductions he claimed in relation to the IT assets, related repairs and maintenance and subscriptions were in excess of $31k.
The Administrative Review Tribunal found that even though Ericsson had used, or at least acknowledged, projects that Hartley had developed in his IT lab, and that his blogging was at least in some part as an Ericsson employee, Ericsson did not require Hartley to perform these activities as part of his job nor use his personal equipment for same. There was an insufficient nexus with his employment duties; instead they were undertaken in respect of his interest in his professional skillset. For that reason the deductions were denied in full.
Unless you’re using the fixed rate method, claiming deductions for work related expenses while working from home is rarely clear cut. The nature of the expense needs to be assessed against all the conditions required to meet deductibility, including whether the expense is private or domestic in nature, and whether there is a true nexus to your employment duties.
Ensure you speak to your tax advisor to assist you in making the correct claim for a tax deduction.
If you would like to discuss these matters, please contact Ross Prosper.