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As the calendar ticks over into July, marking the end of one financial year and the start of the next, many of us will be starting to think about preparing our tax returns. Particularly (once we’ve located all those receipts) how to minimise tax liabilities by claiming the appropriate deductions.

As a general rule, if you live in a home without earning an income from it, you're not eligible for any tax deductions. However, when you work from home for an employer or your own business, or rent out space in your home, you may be eligible to claim tax deductions for some of the additional costs you incur, as this article explains.

Deducations for employees working from home

As a result of Covid and the massive shift to working from home, the home office has become a permanent fixture for many people. Whether you get to work in your PJs every day or work a hybrid model with some days at home and others in the office, there are several tax deductions you may be able to claim.

Expenses you can claim

If you work from home full or part time, you may be able to claim a deduction for the additional running expenses you incur. This includes heating, cooling and lighting expenses; the decline in value of items used for work such as furniture, and internet and phone expenses.

Expenses you can't claim

If you’re working from home you can't claim a deduction for general household items such as coffee, tea or milk, or the cost of any items provided or paid for by your employer such as a laptop or a phone.

What about occupancy expenses?

As an employee working from home, you generally can't claim deductions for occupancy expenses, which include mortgage interest, rent, council and water rates, land taxes and house insurance premiums. However, if you can show that your employer doesn't provide you with an alternative place to work from, or you work in an area of your home used solely for work purposes, you may be entitled to claim occupancy expenses. Visit the ATO website or speak to your tax accountant for more details.

How to calculate your deduction

To calculate your deduction, first select the method that best suits your circumstances from the three available:

1. Shortcut method an all-inclusive rate per work hour (only available for FY 2022)
2. Fixed rate method an amount per work hour for additional running expenses plus expenses not covered by the fixed rate
3. Actual cost method the actual expenses you incur as a result of working from home.

Speak to your accountant or use the ATO’s Home office expenses calculator to work out your deduction.

Deductions for a home-based business

If you run your own business from home, you may be able to claim tax deductions for your occupancy costs including mortgage interest or rent, council rates, land taxes and home insurance premiums; running costs such as electricity, phone, cleaning and decline in value of equipment (depreciation); and travel via car for business purposes. Speak to your accountant or visit the ATO website for more details.

Deductions when renting out part of your home

If you have the space, renting out an unused area of your home, such as a spare room, can be a great way to earn additional income. In this case, the ATO treats the rented space like an investment property, meaning you can potentially claim the same tax deductions, but also that any payments you receive must be declared as rental income in your tax return.

You can only claim expenses related to the area you rent out, and only for the duration it is rented for. Common expenses you can claim a portion of as deductions include Council rates, mortgage interest, home insurance, electricity, gas, cleaning and maintenance costs.

If you are an owner occupier, bear in mind that when you sell your home you may not be entitled to the full main residence exemption from capital gains tax (CGT), and may have to pay CGT on part of any capital gain made. Speak to your accountant or visit the ATO website for more details.

Finally, keep records & submit on time

Whatever situation you fall into or types of deductions you are eligible to claim, it is vital to keep records of all expenses incurred in either paper or electronic format. It’s also a good idea to keep all your records and receipts in one place throughout the year so you can put your hand on them when tax time rolls around.

Lastly, if you’re preparing your own tax return don’t forget to lodge it before 31st October, while if you’ve employed a tax agent they can still lodge a return on your behalf after this date.

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