Home office expense claims are subject to the same general substantiation requirements as other deductions – that is, records must be kept for five years. Home office, phone, internet deductions
But in practice, full compliance with the substantiation rules may be difficult. It may be simple to keep a receipt for a printer purchased for a home business, but not so easy to prove the deductible proportion of a specific utilities bill. So the ATO has provided some administrative guidelines to ease this burden.
Proving business use proportion The ATO will generally accept these three methods of calculating the business use proportion for a particular expense (in order of preference):
Explicit evidence of business use – such as an itemised phone bill.Records of representative periods of use – such as a diary record spanning a 4-week period (see below for details).A “reasonable estimate” – the ATO does not define this term, but the taxpayer must be able to demonstrate that such a component was “reasonably likely” under the circumstances.
4-week representative records Claims exceeding $50 The ATO requires a taxpayer to keep records for a 4-week representative period in each income year in order to claim a deduction of more than $50. It is unclear as to whether the $50 limit applies per expense type or in total.
The taxpayer can choose to keep records for longer than 4 weeks or to base their deduction on itemised bills (see above) for the entire year for a more accurate deduction. The 4-week record is merely the minimum amount of record-keeping that the ATO will accept. It is not a legal requirement to produce a time-limited representative record like the 12 week log book for car expense deductions (Division 28).
Remember to adjust the deduction for periods of leave taken.
According to an ATO fact sheet, the ATO will look favourably upon evidence that the employer expects the taxpayer to work at home or make work-related calls. But be aware that employer expectation is not a legal requirement. Under legislation and common law covering work-related expenses, it is enough that the expenditure is incurred in the course of producing assessable income and is not private, domestic or capital in nature.
Claims of $50 or less It can be inferred (although it is not explicitly stated) that claims of $50 or less will not be subject to substantiation checks by the ATO. This however only affects the substantiation of the amount, and does not change the fact that the amount still has to be deductible under law. Therefore it would be prudent for the taxpayer to be able to show that they had a reasonable basis for making the claim (keep evidence that some work was done at home during the year).
Shared expenses According to the ATO, an invoice in the name of one person is acceptable as evidence of incurred expenditure for more than one person. This may be relevant where spouses or rental accommodation housemates each do home-based work, using shared utilities.
Substantiation for mobile, home phone and internet costs The ATO has issued guidance on making claims for mobile phone use as well as home phone and internet expenses.
It says that if a client uses any of these for work purposes, they may be able to claim a deduction if there are records to support claims. But the ATO points out that use for both work and private use will require a taxpayer to work out the percentage that “reasonably relates” to work use.
Substantiating claims The ATO requires that records are kept for a four-week representative period in each income year to claim a deduction of more than $50. These records can include diary entries, including electronic records, and bills. “Evidence that your employer expects you to work at home or make some work-related calls will also help you demonstrate that you are entitled to a deduction,” its guidance says.
When your client can’t claim a deduction for their phone Of course if their employer provides your client with a phone for work use and also pays for usage (phone calls, text messages, data) then they are not able to claim a deduction. Similarly, if your client pays for usage but are subsequently reimbursed by their employer, they are not able to claim a deduction.
How to apportion work use of the phone As there are many different types of plans available, your client will need to determine the work use using a reasonable basis.
Incidental use If their work use is incidental and they are not claiming a deduction of more than $50 in total, they can make a claim based on the following, without having to analyse their bills:
$0.25 for work calls made from a landline$0.75 for work calls made from a mobile$0.10 for text messages sent from a mobile.
Usage is itemised on bills If they have a phone plan where they receive an itemised bill, they need to determine their percentage of work use over a four-week representative period, which can then be applied to the full year.
They need to work out the percentage using a reasonable basis. This could include:
the number of work calls made as a percentage of total callsthe amount of time spent on work calls as a percentage of total callsthe amount of data downloaded for work purposes as a percentage of total downloads.
Usage is not itemised on bills If they have a phone plan where they don’t receive an itemised bill, they can determine their work use by keeping a record of all calls over a four-week representative period and then calculate their claim using a reasonable basis.
The ATO uses an example to further explain this. Ahmed has a prepaid mobile phone plan that costs him $50 a month. He does not receive a monthly bill so he keeps a record of his calls for a four-week representative period. During this four-week period Ahmed makes 25 work calls and 75 private calls. He worked for 11 months during the income year, having had one month of leave. He therefore calculates his work use as 25% (25 work calls out of 100 total calls). He claims a deduction of $138 in his tax return (25% x $50 x 11 months).
Bundled phone and internet plans Nowadays phone and internet services are often bundled together. The ATO says that when taxpayers are claiming deductions for work-related use of one or more services, they need to apportion their costs based on their work use for each service. “If other members in your household also use the services, you need to take into account their use in your calculation.”
If a taxpayer has a bundled plan, they need to identify their work use for each service over a four-week representative period during the income year. This will allow them to determine their pattern of work use, which can then be applied to the full year.
A reasonable basis to work out their work-related use could include:
Internet:
the amount of data downloaded for work as a percentage of the total data downloaded by all members of the householdany additional costs incurred as a result of work-related use – for example, if work-related use results in them exceeding their monthly cap.
Phone:
the number of work calls made as a percentage of total callsthe amount of time spent on work calls as a percentage of total callsany additional costs incurred as a result of work-related calls – for example, if work-related use results in them exceeding the monthly cap.
Again, the ATO uses a worked example to illustrate.
Des has a $90 per month home phone and internet bundle, and unlimited internet use as part of his plan. There is no clear breakdown for the cost of each service. By keeping a record of the calls he makes over a four-week representative period, Des determines that 25% of his calls are for work purposes. Des also keeps a record for four weeks of the data downloaded and determines that 30% of the total amount used was for work.
He worked for 11 months during the income year, having had one month of leave. As there is no clear breakdown of the cost of each service, it is reasonable for Des to allocate 50% of the total cost to each service.
Step 1 – work out the value of each bundled component. Internet: $45 per month ($90/2 services). Home phone: $45 per month ($90/2 services).
Step 2 – apportion your work related use. Home phone: 25% work related use x $45 per month x 11 months = $124. Internet: 30% work related use x $45 per month x 11 months = $149. In his tax return Des claims a deduction of $273 ($124 + $149) for the year.
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