Tax Tips for Working from Home: Fixed Rate Method vs Actual Cost Method
- MDP Accounting & Tax
- Mar 8
- 5 min read
Working from home has become a norm for many of us, and with that comes the opportunity to claim tax deductions on your home office expenses. But how do you decide which method to use for your tax deductions? Should you go with the simple fixed rate method or the potentially more beneficial actual cost method? Let’s break it down together and explore how you can make the most of your working-from-home tax claims.
Understanding the Fixed Rate Method and Actual Cost Method
When it comes to claiming deductions for working from home, there are two main methods you can use:
Fixed Rate Method: This is straightforward. You claim a set rate per $0.70 hour for the time you work from home. It covers expenses like electricity, internet, and phone use without needing to keep detailed records of each cost.
Actual Cost Method: This method requires you to calculate the actual expenses you incur for working from home. It’s more detailed but can be more beneficial, especially if you have a dedicated home office or rent your home.
The fixed rate method is simple and convenient, but if you have a large home office or pay rent, the actual cost method might save you more money. Let’s dive deeper into how the actual cost method works and what you can claim.
How the Actual Cost Method Works
Using the actual cost method means you calculate your deduction based on the real additional expenses you incur while working from home. This includes:
Decline in value of depreciating assets: Items like your desk, chair, computer, laptop, phone, and other office furniture.
Electricity and gas: Costs for heating, cooling, and lighting your home office.
Phone, data, and internet expenses: Both home and mobile phone bills related to work.
Stationery and consumables: Printer ink, paper, and other office supplies.
Cleaning expenses: The cost of cleaning your dedicated home office space.
If you use these items for both work and private purposes, you’ll need to apportion your claim fairly. Only the work-related portion can be claimed as a deduction.
Occupancy Expenses
In some limited cases, you might also be able to claim occupancy expenses like mortgage interest or rent. This usually applies if you have a dedicated home office that you use exclusively for work.
Decline in Value of Depreciating Assets
If you buy an item for $300 or less and mainly use it for work, you can claim an immediate deduction for the full cost in the year you purchase it. For example, a $250 office chair used mostly for work can be claimed right away.
For items costing more than $300, or if they form part of a set that together costs more than $300, you claim a deduction for the decline in value over the effective life of the item. This is called depreciation.
You can also group low-cost assets (under $1,000) into a low-value pool and calculate depreciation using a diminishing value rate.
If you use an asset for both work and private purposes, you can only claim the work-related portion. For example, if you buy a device for $289 and use it 80% for work, you can claim $231 (80% of $289) as a deduction.
To claim these deductions, you must:
Keep receipts showing what you spent.
Show the percentage of time you used the asset exclusively for work.
You can use tools like the depreciation and capital allowances tool to help calculate your deductions.
Cleaning Expenses for Your Home Office
If you have a dedicated home office, you can claim a portion of your cleaning expenses. To do this, calculate the cost of cleaning your home and apportion it based on the floor area of your home office compared to the whole house.
For example, if your home office is 10 square meters and your entire home is 100 square meters, you can claim 10% of your cleaning costs as a deduction. Remember to adjust this if other household members use the space or if you use it for private purposes.
Example: Estimating Hours Worked from Home
Let’s look at Wanda’s situation to understand how to claim deductions using the fixed rate method.
Wanda works from home one day a week, 8 hours each day. She uses her employer’s laptop and mobile phone but pays for her own internet and electricity. Wanda kept her internet and electricity bills but didn’t keep records of the hours she worked from home from 1 July 2024 to 28 February 2025. She estimated she worked 280 hours during this period.
However, the tax office requires records to be kept at the time you work from home if you want to use the fixed rate method. So, Wanda started keeping a record of her working hours from 1 March 2025 to 30 June 2025, logging 136 hours.
Wanda can only claim the fixed rate deduction for the 136 hours she recorded, calculated as:
136 hours × 70 cents = $95 (cents disregarded, not rounded)
She cannot claim for the earlier period because estimates are not accepted.
Which Method Should You Choose?
The fixed rate method is great if you want a simple way to claim your working-from-home expenses without keeping detailed records. It covers electricity, internet, and phone costs at a flat rate of 70 cents per hour.
However, if you have a large home office, rent your home, or have significant expenses like office furniture and equipment, the actual cost method could save you more money. It requires more record-keeping but allows you to claim a wider range of expenses, including depreciation and cleaning costs.
Tips for Choosing the Best Method
Keep good records: If you want to use the fixed rate method, start logging your hours worked from home as you work.
Track your expenses: Save receipts for office furniture, internet bills, electricity, and cleaning.
Calculate both ways: Sometimes it’s worth calculating your deduction using both methods to see which gives you a bigger claim.
Review your situation annually: Your work-from-home setup and expenses might change, so reassess your method each tax year.
Making Tax Time Less Stressful
Working from home can blur the lines between personal and work expenses, but with clear records and a good understanding of your options, you can confidently claim your rightful deductions. Remember, the goal is to stay compliant, reduce stress around tax, and make informed financial decisions.
If you’re ever unsure, consulting a tax professional can help you navigate the complexities and ensure you’re maximising your deductions without risking compliance.
By understanding the differences between the fixed rate and actual cost methods, and knowing what expenses you can claim, you’re well on your way to making the most of your working-from-home tax deductions. Keep your records tidy, stay informed, and take control of your tax situation with confidence.
Happy claiming!
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