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The ATO’s revised fixed rate method for expenses requires rigorous time-keeping records.
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Why you’ll need to watch the clock when you WFH
10 March 2023
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Following a period of consultation the ATO finalised PCG 2023/1 on work from home expenses on 16 February. The PCG explains the ATO’s compliance approach to taxpayers who claim a deduction for additional running expenses incurred while working from home (WFH) using the new revised fixed rate method (RFRM).
Prior to 1 July 2022, taxpayers could use one of the following methods to calculate their WFH expenses:
- Actual cost – taxpayers calculate the actual costs incurred when they WFH and maintain all records and evidence to determine the work-related proportion of expenses incurred.
- Previous fixed rate method (PS LA 2001/6) – provided taxpayers with a deduction at the rate of 52c per hour to cover certain WFH expenses.
- Shortcut method (PCG 2020/3) – a temporary administrative approach that assisted millions of taxpayers during the COVID-19 pandemic. The shortcut method provided taxpayers with a deduction at the rate of 80c per hour to cover additional running expenses incurred while working from home. This method was available only from 1 March 2020 to 30 June 2022.
From 1 July 2022, when calculating their deduction for WFH expenses, taxpayers need to use the actual expenses method if they do not use the RFRM (which replaces the previous fixed rate method).
Eligibility criteria
Taxpayers can rely on the RFRM if they:
- WFH
- Incur additional running expenses as a result of WFH
- Keep the relevant records
Under the RFRM, taxpayers claim their WFH expenses at the rate of 67c per hour. The RFRM covers electricity and gas expenses for heating, lighting and cooling, internet expenses, mobile and home phone expenses, and stationery and computer consumables.
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The rate does not include the decline in value of any office furniture or office equipment. This differs from the previous fixed rate method, which included the decline in value of office furniture but excluded mobile phone expenses and stationery and computer consumables expenses.
Working from home
To satisfy the first criterion, taxpayers must WFH while carrying out their employment duties, or when running their business, on or after 1 July 2022. The work must be directly related to the income producing activities and does not cover minimal tasks such as occasionally checking emails or phone calls.
Importantly, taxpayers are not required to have a dedicated home office space when they WFH. This differs from the previous fixed rate method and is welcome given the shift in regular working patterns during the pandemic. Many taxpayers may not be able to work in a separate room if other householders simultaneously WFH. In contrast, the actual cost method generally requires a dedicated office as the ATO does not consider a taxpayer incurs additional running expenses if other members of their household (who are not WFH) are in the same room as them while they WFH.
Incur additional running expenses
To satisfy the second criterion, taxpayers must incur additional expenses covered by the RFRM. Taxpayers need not incur all the types of expenses covered by the RFRM; a taxpayer can rely on the RFRM by incurring just one type.
Sensibly, the ATO does not require taxpayers to undertake a comparative analysis to demonstrate they have incurred additional expenses when they WFH. A record of the hours worked from home and invoices/bills in the name of the taxpayer will be sufficient to demonstrate an additional expense has been incurred.
Record keeping requirements
To satisfy the third criterion, taxpayers will need to keep:
- Records showing the total number of hours spent WFH in the income year, and
- One document (such as an invoice, bill or credit card statement) for each type of additional running expense that was incurred in the income year.
Record of actual hours worked
The PCG clarifies that a record of the total number of hours worked can take any form, provided 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 based on a representative period will not be allowed.
The ATO has pleasingly provided a concession regarding this requirement for the period from 1 July 2022 to 28 February 2023. During this period, taxpayers need only have kept a record that is representative of the hours worked, with the full record keeping requirement commencing from 1 March 2023.
Needless to say this is two-thirds of the way through the current income year. Affected taxpayers need to quickly understand their new record-keeping obligation so they can maintain a contemporaneous record of actual hours worked from 1 March 2023. Undoubtedly, despite education efforts, many taxpayers may become aware of this obligation only after the end of the 2022–23 income year – and it will not be acceptable for taxpayers to go back and reconstruct their actual hours worked from home many months later.
Things to look out for
Commissioner’s legislative limitation
Unlike, say, subsection 28-25(4) of the Income Tax Assessment Act 1997 (ITAA 1997), which authorises the Commissioner to determine rates of cents per kilometre for claiming car expenses, the tax law does not prescribe that the Commissioner may determine a rate for claiming WFH expenses.
Following the withdrawal of the shortcut method, taxpayers would have been left with only the actual cost method. Acknowledging the challenges with determining a WFH claim based on actual costs, the Commissioner has exercised his general powers of administration.
While not able to prescribe an hourly rate for WFH as such, the Commissioner has instead adopted the administrative approach that compliance resources will not be allocated to reviewing claims for WFH expenses made on the basis of 67c per hour, provided an actual record of hours worked from home is kept.
Objection rights
The role of a PCG is to communicate how the ATO will devote compliance resources to taxpayers’ WFH claims. It is not a statement of the ATO’s interpretation of the law and offers only an administrative concession. Practically, taxpayers will not be able to rely on the RFRM method in the event of an objection.
Taxpayers seeking to amend their WFH claims during an objection can rely only on the actual cost method. This will be problematic for taxpayers who have not kept the relevant records to accurately determine the actual costs incurred.
The inability to rely on an administrative concession during an objection is not new, but it highlights a deficiency in the law. Taxpayers should not be worse off, or lack objection rights, when relying on administrative concessions instead of a statute or legislative determination by the Commissioner.
A legislative amendment is needed that allows the Commissioner to set an hourly rate. This would provide taxpayers with certainty and ensure taxpayers can rely on a simplified rate during objections and other reviews. A well-designed legislative provision trumps an administrative concession for certainty and preserving taxpayers’ rights.
Limitations on other claims
Taxpayers who rely on the RFRM cannot claim an additional separate deduction for any of these expenses. For example, expenses for a mobile phone used for work purposes when not WFH cannot be separately claimed in addition to the hourly rate. The rate is intended to cover all work-related uses of the mobile phone.
Is the outcome better using the actual cost method?
Taxpayers and tax practitioners need to be aware of all the implications when determining if the RFRM is the optimal method that best reflect the costs of WFH.
Taxpayers may choose the actual cost method over the RFRM if this results in a higher claim. This may lead to some taxpayers keeping two different sets of records: one for the RFRM and another for the actual cost method, before deciding at the end of the year which method they apply. This is reminiscent of employers weighing up multiple valuation rules in the FBT law for car, meal entertainment and car parking fringe benefits before choosing the optimal one.
Further, contemporary, more practical guidance from the ATO is needed to assist taxpayers in working out claims for electricity and gas, and mobile phone and internet expenses when using the actual cost method. It is hoped this will be forthcoming soon.
Main residence exemption
Taxpayers who use their main residence as a place of business, and not merely WFH, may have to consider CGT consequences. Using a main residence as a place of business may entitle the taxpayer to deduct some, or all, of the interest on a loan to acquire the property. Irrespective of whether the taxpayer actually borrowed money to acquire the property, paragraph 118-190(1)(c) of ITAA 1997 allows the taxpayer to claim only a partial main residence exemption where – if the taxpayer had incurred interest on money borrowed to acquire the property – the taxpayer could have deducted some or all of that interest.
Importantly, being eligible to deduct interest on a loan for a property, regardless of whether any interest was actually deducted, results in the taxpayer losing the full main residence exemption on the eventual sale of the property.
Final comment
Many taxpayers who want a simplified set of rules to calculate their WFH expenses will welcome the RFRM, however, there is still scope for further consideration and debate.
A key question is whether the rate of 67c per hour for 2022–23 is an appropriate representation of the cost of WFH, especially in the current climate of high cost-of-living pressures. The ATO has stated this hourly rate is based on the ABS household expenditure survey with consideration of annual CPI weightings for the four categories of expenses comprising the rate. Even when inflationary pressures ease, the cost of living for most Australians will likely be higher than the historical data that has led to the current rate. It will be important for the rate to be regularly reviewed and updated to ensure it accurately reflects the true costs incurred by taxpayers.
Challenges also remain with the legislation that has led to the current situation. Taxpayers are required to undertake the practically challenging task of either recording, calculating and apportioning actual expenses or relying on the imperfect administrative concession provided by the ATO. As noted above, amending the legislation to provide the Commissioner with the power to set and regularly review an hourly rate for WFH would go a long way in helping taxpayers in this regard. WFH is no longer temporary for a significant proportion of the community for whom this is their modus operandi. Consequently, a greater number of taxpayers need certainty and protection of their rights going forward.
Robyn Jacobson is the senior advocate at the Tax Institute.
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