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Home office expenses: a tax deduction guide for business owners

a woman is calculating her home office expenses at home

Working from home and running a home business has become much more common and “normal” over the past few years. In this guide, we are going to cover:

  • What’s the difference between a home office vs. conducting a home business?
  • What home office expenses can you claim?
  • How do you calculate your home office expense deduction - 3 different methods?
  • Capital gains tax (CGT) implications 
  • The importance of keeping records and seeking professional advice

Home Office vs. Conducting a Home Business

The type of expenses you can claim is determined by whether you are running a business from home, or simply using your home office.

Using a Home Office is where you work from home to fulfil your employment duties, not just carrying out minimal tasks, such as occasionally checking emails or taking calls.

Conducting a home business is one where your home is also your principal place of business. That is, you run your business at or from home, and have a room or space set aside exclusively for business activities. 

How you operate your business matters

How you operate your business (in other words your business structure) has an impact on what home office expenses you can claim.

If you operate your business as a sole trader or partnership and your home is the principal place of business, you can claim a tax deduction for the running and occupancy expenses for your home office. 

If you operate your business as a company or trust, you must have a genuine, market-rate contract (or similar agreement) with the property owner. This will determine the amount of tax you can claim as a deduction. However, if the contract or rental agreement is not deemed genuine, you may run into issues.

What home office expenses can I claim? 

There are two types of home office expenses you can claim: 

  • running expenses
  • occupancy expenses.

Running expenses

Running expenses refer to the cost incurred for using your home utilities to conduct business activities. For example, 

  • Heating, cooling and lighting 
  • Home phone and internet 
  • Depreciation of business furniture and equipment 
  • Cost of repairs of business equipment 

You are eligible to claim running expenses even though you don’t have a work area at home or your home is not the principal place of your business.

Occupancy expenses

Occupancy expenses refer to the cost you pay for your own or rent your home. For example, 

  • Mortgage interest or rent 
  • Rates
  • Land taxes
  • Home and content insurance

You are only eligible to claim occupancy expenses as a part of tax deduction if the area of your home is the principal place of business. It should be clearly identified as a place of business. This means the area shouldn’t be easily adaptable for personal or domestic use and it should be used exclusively or almost exclusively for business purposes.

When calculating occupancy expenses, the amount you could claim for tax deduction depends on the proportion of the area and the year it is used for business.

How to calculate home office expenses? 

There are three methods to calculate home office expenses:

  • Method 1: The fixed rate method - An amount per work hour for additional running expenses plus expenses not covered by the fixed rate
  • Method 2: The actual cost method - The actual expenses you incur because of working from home
  • Method 3: The shortcut method - An all-inclusive rate per work hour, only available from 1 March 2020 to 30 June 2022

Choosing which one of the three methods to calculate home office expenses is entirely up to you as long as it is reasonable for your business situation. Your accountant will be able to help you choose a method that gives you the largest deduction.

You can also find out more about what other business expenses you can claim here

Method 1: The fixed rate method 

Using ATO’s fixed rate method is the most straightforward method when calculating home office expenses as a business owner. 

  • It uses a flat rate of 52 cents for each hour you worked from home. 
  • This rate includes running expenses such as heating, cooling, lighting, depreciation of home office furniture and furnishing, and cleaning for the home office. 
  • Does not include home office expenses such as phone and internet, depreciation of assets, and computer consumables and stationery (e.g., ink). You will need to calculate those home office expenses separately. 

All you need to do to claim this is to keep a diary – note the time you start work each day, the time you finish work each day and any breaks. To simplify this, you can use a representative 4-week period. You can then claim 52 cents per hour for each working hour. 

For example, you work from home 30 hours per week during a representative 4-week period. This means the total home office expenses you could claim using the fixed rate method for the year (assume you work 50 weeks per year) is 30 hours x 50 weeks x 52 cents = $780 

Once you calculate your deduction, enter the amount at 'Other work-related expenses' in your tax return.

Method 2: The actual cost method 

Another method is to claim the actual costs incurred. This means you will need to calculate each item individually and keep the records of the proportion of business and personal use of the items and the hours using them for work. 

You may be eligible for an immediate tax deduction if the depreciating assets cost less than $300 whereas for depreciating assets cost more than $300, you can only claim a tax deduction for their decline in value over the business proportion in their effective life.

For example, according to the records and diary you keep over a 4-week period, you spend 30% of your time from your home office. This means you can claim 30% of the costs of the following expenses:

  • Heating, cooling, and lighting 
  • Internet 
  • Cleaning expenses
  • Phone 
  • Depreciation

If you use your home office as a primary place of business (e.g., a hairdresser), to calculate occupancy costs while using the actual cost method, you will need to calculate the percentage of your workspace to the total space of your home. The following is how you calculate the deduction:

Total occupancy expenses (actual) × floor area percentage × % used for work purposes

Method 3: The shortcut method 

The shortcut method is the temporary and simplified method to use in order to work out your home office expenses for tax deduction. This method will only be effective until 30 June 2022. Therefore, from 30 June 2022 onwards, you need to choose to use either fixed rate method or the actual cost method. 

When using the shortcut method, you are eligible to claim 80 cents per hour for each hour you work from home. However, you can’t claim any other home office expenses. This 80 cents covers all your home office expenses such as phone, internet, depreciation of equipment and furniture, as well as heating, cooling, and lighting. 

You are required to keep all the records of the number of hours you work from home using a timesheet, roaster, or diary.

Capital Gains Tax (CGT) implications

In general, CGT doesn’t apply when you sell your home. However, if you intend to claim occupancy expenses because your home is the place where you conduct your business, there may be capital gains tax implications. This means CGT may be applied to the proportion of your home and the period of it being used for business. 

There are a few exemptions when CGT won’t apply. These are when you operate your business from a rented property, when you do not have an area in your home that is exclusively for business use, or when you operate your business as a company or trust. 

Keeping records and seeking professional advice

It’s important to keep records of all the home office expenses you intend to claim such as invoices, evidence of payment, and business bank statements. If you are claiming occupancy expenses, you need to keep records of mortgage interest, insurance, council rates, and rental agreement if you operate as a company or trust. 

You are also required to keep records of how home office expenses are calculated to make the claims. These records need to be kept for at least five years. Using accounting software such as Xero not only helps reduce time spent on admin but creates an easy ‘paper trail’. Talk with your Beany accountant to find out more.

Key takeaways

If you are a business owner that runs your business from home, you might be able to claim home office expenses for tax deductions. There are 2 types of expenses you could claim: running expenses and occupancy expenses. Whether you will be able to claim running expenses or both will depend on your business structure. 

The following table summarises whether you’re eligible to claim home office expenses as part of your tax deduction:

a table to illustrate which home office expenses are claimable and not claimable in relation to home work area

While the fixed rate method and the shortcut method are relatively easy to use, the actual cost method can be tricky to calculate but may end up getting you a larger deduction. You may want to consult an accountant. Talk to a Beany accountant today and find out how you can seriously save your tax. 

Visit ATO’s website, if you want to know more about home office expenses

Who are Beany?

We’re an online accounting firm that is always right here for you, your accounting pain relief. The most advanced technology lets us work way more closely with you than a normal accountant would. 

We have a dedicated team of remote accountants to take care of your business no matter where you are, so you can focus on growing your business. We take out the ‘fluff’, break down the barriers and get things done. Looking out for you is what we are all about. Get started for free today.  

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