ATO warns taxpayers on claiming WFH rent, interest deductions

This is because, to claim home occupancy expenses, an area of the home must qualify as a ‘place of business’. This typically requires part of the home to be clearly identifiable and used exclusively as a work area, and separate from the rest of the private residence.

The other key condition is that the client’s role requires them to work from such a place and that there is no alternative office or workplace. Many clients will not qualify to claim deductions for rent or interest because their employer has an office or another workplace the employee could use.

This is not new. However, the ATO’s warning now makes it clear that this could still be a problem even if they live far from the employer’s office and choose to work from home. 

It seems working arrangements driven by flexibility to accommodate the employee are prone to causing issues. We’ve seen examples of private rulings where the ATO suggests this can cause a problem with claiming occupancy expenses, even where the employer has a distant office in a different state from where the employee lives (see PBR 1052307838051).

This seems to cause a problem because the employee’s need to work from home stems from their choice to live far from their employer’s office. This is seen as a private choice.

Presumably, this is less likely to cause a problem where the employee’s role and duties require them to be present in the area where they live, even if the employer has an office or workplace in a different state. This seems to be alluded to in the private ruling referred to above, but you can’t rely on a private ruling issued to another taxpayer, and the ATO’s guidance could be clearer.

These concepts are also not mutually exclusive. While an employee might choose to live somewhere far from the employer’s office, the employer might also have a business need for the employee to be based there. This is where things become tricky.

The real challenge is that the potential need to make these judgements and draw these distinctions raises the complexity level in an area where there can be significant tax consequences.

While some clients might choose a conservative approach by not claiming any home occupancy expenses, they could technically be exposed to adverse CGT outcomes on a future sale of their home if it turns out they were entitled to claim some occupancy costs. This is because the main residence exemption provisions in section 118-190 focus on whether the individual could have claimed a deduction for some of the interest expenses incurred in connection with the property. 

When a client sells their home and isn’t able to apply a full exemption under the main residence provisions, we look at other ways to reduce any capital gain that arises. First, we would normally check if the capital gain can be reduced by the CGT general discount (or indexation from 1 July 2027).

Also, if part of the home has been used in a business carried on by the client or a related entity, we would check whether they can access the small business CGT concessions. This can provide some generous CGT savings but involves a more detailed analysis (see ATO signals narrow approach on CGT for home-based business).

What is clear is that the ATO’s warning signals to practitioners that it is finding mistakes when taxpayers working from home claim rent and interest deductions. The warning also suggests that the ATO generally doesn’t think employees will qualify for these types of deductions. While this will depend on the situation and the approach might be straightforward in many cases, it is important to be aware that the analysis can quickly become more involved when the client’s scenario moves outside the norm.