Home Office Expenses for Small Business

Working from home is now simply how many small businesses run — quotes drafted at the kitchen table, invoices sent after dinner, sometimes the whole operation in a spare room. The deduction that follows looks like the easiest one on the return, which is exactly why it causes so much trouble. There are two ways to claim, they suit different situations, and both stand or fall on a record most people only start thinking about at tax time.

Two methods, two different bargains

The fixed rate method applies a set rate for every hour you genuinely work from home — check the current ATO rate per hour, as it is adjusted from time to time. The rate is designed to cover running costs such as electricity, gas, internet, phone usage, stationery and computer consumables, which means you cannot claim any of those items again separately. You can, however, still claim the decline in value of equipment such as a desk, chair or computer on top of the hourly rate.

The actual cost method claims the work-related share of what you actually spent. It tends to reward people with a dedicated work space and a genuine appetite for record-keeping: you need the receipts, and a defensible basis — floor area, hours of use — for splitting each cost between business and private use. More work, sometimes a better result; there is no universally right answer, only the right answer for your setup.

The record that decides everything

Whichever method you use, the hours matter, and the ATO expects a record of the actual hours you worked from home — a diary, timesheet, roster or similar, kept as you go rather than invented in July. An estimate for the whole year based on one typical week is generally no longer acceptable for the fixed rate method. Missing hours records are the single most common reason home office claims fall over in review, and the problem is entirely avoidable.

Occupancy costs and the trap behind them

Running costs are one thing; occupancy costs — rent, mortgage interest, council rates, house insurance — are another matter entirely. They are generally only claimable where part of the home is genuinely a place of business, such as a dedicated area with its own business character, not merely a convenient place to work. And there is a sting worth understanding before you claim: if you own the home and claim occupancy costs, part of the main residence exemption from capital gains tax may be affected when you eventually sell. That trade-off deserves proper advice before the first claim goes in, not a surprise years later.

One more distinction: if your business runs through a company or trust, the expenses belong to the entity rather than to you personally, and arrangements such as charging the company rent for using your home carry their own tax consequences — the sole trader approach does not simply copy across.

What we commonly see go wrong

• No hours record at all, and a claim built backwards from what last year looked like.
• Internet and phone claimed separately on top of the fixed rate, which already covers them.
• Occupancy costs claimed casually against an owned home, with no thought given to the capital gains consequences.
• Two people working from the same home both claiming the same costs in full instead of splitting them.

A worked example

As an illustration: a consultant claims the fixed rate for a round 40 hours a week, every week of the year. In a review, the ATO asks for the record behind the hours, and there is none — meanwhile her calendar shows client site visits, holidays and a quiet January. A simple diary kept as she went would have supported a substantial and entirely defensible claim. The invented number put the whole deduction under pressure, not just the exaggerated part of it.

When to get help

If you are unsure which method leaves you better off, if you are considering claiming occupancy costs against a home you own, or if your business runs through a company and you want the home arrangement structured properly, it is worth a short conversation before the claim goes in. Unwinding a poorly framed claim costs far more than setting it up correctly the first time.

Which method gives the bigger deduction — fixed rate or actual cost?

It depends on your setup. The fixed rate method is simpler and covers running costs at a set amount per hour — check the current ATO rate. The actual cost method can produce a larger claim if you have a dedicated work space and keep thorough records. It is worth comparing both in your first year rather than assuming.

Do I really need to record my hours?

Yes. For the fixed rate method the ATO expects a record of the actual hours worked from home, kept as you go — a diary, timesheet or similar. A representative-week estimate is generally no longer enough, and a missing hours record is the most common reason these claims fail in review.

Can I claim part of my rent or mortgage interest?

Only in limited situations. Occupancy costs are generally claimable only where part of the home is genuinely a place of business, not just a convenient place to work. If you own the home, claiming them may also affect the main residence exemption from capital gains tax when you sell — get advice before claiming rather than after.