Deductions
Actual cost method
The actual cost method lets you claim the work-related share of each running cost, such as electricity, phone and internet, based on what you really spent and how much you used for work.
Under the actual cost method you work out your deduction by calculating the actual work-related portion of each expense, rather than applying a flat rate. It is most often discussed in connection with working from home, but the same idea applies wherever a cost has both a work and a private element and you choose to measure the real business share.
In practice this means gathering the bills and evidence for each cost you want to claim. For electricity you might calculate the extra usage of your office equipment and lighting for the hours you worked. For a phone or internet service you may look at itemised usage over a representative period and work out the work percentage. For furniture and equipment, you claim the decline in value or an immediate deduction if the item qualifies. Every figure needs a reasonable, documented basis.
The method usually takes more effort than the fixed rate method, but it can produce a larger deduction for people with high costs, for example someone running a dedicated home office with significant equipment and electricity use. It can also be the better choice if you cannot or do not want to keep a full record of hours worked at home, although you still need records that support your calculations.
For a business registered for GST, the actual cost method fits neatly with GST credits. You can only claim a credit for the part of a purchase used in your business, so the same work percentage that supports your income tax deduction is generally used to apportion the GST credit. You also need a valid tax invoice for purchases above the invoice threshold of $82.50 GST inclusive, and the credit is claimed in the BAS for the relevant period.
Records must generally be kept for five years from the date you lodge the return or the date the information is relevant to. That includes the invoices, the working papers showing how you calculated the work percentage, and any diary or usage log. The ATO may ask you to explain your method, so a short written note describing how you arrived at each percentage can be very helpful.
A frequent mistake is claiming the full cost of a bill that clearly includes private use, such as the whole household internet bill. Another is changing methods from year to year without understanding the effect on records. If you use the actual cost method you should not also claim the same costs under the fixed rate method. This is general information only, and you should confirm how it applies to you with the ATO or a registered tax professional.
Worked example
Tom runs a small consulting business from a spare room. His annual internet bill is $1,320 including GST. A usage review over a typical month shows 60% of use is for business. Business share is 60% x $1,320 = $792 inclusive of GST. The GST credit is $792 / 11 = $72, and the income tax deduction is the GST-exclusive amount of $720. He keeps the invoices and his usage notes.
Practical tips
- Write down how you worked out each work percentage and keep it with your bills. A clear method is your best protection if the ATO asks questions.
- Do not claim a whole bill that includes private use. Claim only the genuine business portion, and apportion the GST credit the same way.
- If your costs are modest and you work regular hours at home, compare the result with the fixed rate method before choosing.