A Full Federal Court decision handed down earlier this year has reinforced a distinction that trips up a lot of employees and business owners working from home, the difference between running expenses and occupancy expenses. 

The two types of home office expense 

Running expenses cover the additional cost of working from home, electricity, internet, phone use, depreciation of office equipment. These are generally deductible for employees and business owners alike, either using the fixed rate method (70 cents per hour) or the actual cost method. Both methods require a record of the actual hours worked from home for the entire year, not an estimate or a sample period. 

Occupancy expenses cover the cost of the property itself, rent, mortgage interest, council rates, home insurance. These have always been much harder for employees to claim. 

What the court decided 

The case involved an employee who was required by his employer and by COVID-19 restrictions to work from a dedicated room in his rented apartment for the majority of his role. He claimed a portion of his rent as a deduction. The Full Federal Court ruled against him, even though the room was used exclusively for work and he had no real choice about where he worked. 

The court’s reasoning matters more than the facts. Rent is private or domestic in nature because of what it is, payment for accommodation, not because of how the space is used. Being compelled to work from home, using a room exclusively for work or having no alternative workplace does not change that. 

What this means for you 

If you are an employee (including a director who is an employee of their own company) working from home, occupancy expenses are not deductible. This applies even if you have a dedicated space used only for work. The only real exception is where your home is genuinely your place of business, for example a health practitioner seeing clients from a home clinic and even then there can be a trade-off with your main residence exemption if you own the property. 

Running expenses are unaffected by this decision. Keep claiming them and keep your hours records up to date for the whole year. 

What if the business is a trust or company? 

Hall is about an individual claiming a personal deduction for their own home. It doesn’t directly stop a trust or company from paying rent for the space it uses, but there are real issues to work through before going down that path. 

If a director or related individual owns the property, the entity can in theory pay arm’s length rent under a genuine lease or licence for the part of the home used for the business. Done properly, the rent is deductible to the entity and assessable income to the property owner. In practice, this option comes with several problems: 

• If the property is rented rather than owned, the head lease usually prohibits subletting or business use, so this option is often not available at all. 

• The property owner will generally lose part of their main residence exemption on the portion of the home covered by the lease, based on floor area and how long the arrangement runs. 

• If the entity pays for home expenses directly rather than under a genuine lease, this is likely to be treated as a housing or expense payment fringe benefit. Since Hall confirms the individual could not have claimed the expense personally, the “otherwise deductible” rule can’t reduce the taxable value, so FBT applies in full. 

• Council zoning and body corporate or strata rules can restrict running a business from a residential property regardless of the tax position. This is outside our expertise so it’s worth checking with your local council or body corporate before setting anything up, particularly if a nosy neighbour is the sort to notice. 

For most family businesses, the simpler and lower risk option is for the trust or company to claim the business-use portion of genuine running costs (electricity, internet, phone, equipment) rather than setting up a lease arrangement for occupancy. This avoids main residence complications and reflects how most home-based businesses are structured. 

Key takeaway 

If you or your business has been claiming a portion of rent, mortgage interest or rates for a home office, it’s worth checking that claim with your accountant. Running expenses remain fully available under the usual methods and if you’re operating through a trust or company, get advice before setting up any lease arrangement with the property owner.