ATO desperate to close costly work-from-home rent deduction loophole after landmark ruling

Australian renters could soon be eligible to claim thousands of dollars in tax deductions after a shock judgment by the Administrative Appeals Tribunal.

The Australian Taxation Office is now scrambling to overturn the decision, warning it could blow a significant hole in the Federal Budget and cost taxpayers billions of dollars.

The case centres on ABC radio presenter Ned Hall, who claimed $5878 in occupancy costs for a second bedroom in his Melbourne apartment that he transformed into a home office during the pandemic.

Mr Hall relocated to Melbourne with his wife in June 2020, renting a two-bedroom apartment he deliberately chose with a room he could use exclusively as a home office.

His wife, a yoga instructor, continued her classes online from the apartment’s main living area. Due to COVID lockdown restrictions and his employer’s instructions, Mr Hall was required to work primarily from home.

His role was split: about 75 per cent of his work was a digital role performed at home, while the remaining duties, mostly live sports broadcasting, had to be done at the ABC’s Southbank studios.

The second bedroom, equipped with a desk, chair, and bookcase, was solely used as his workspace to provide a quiet environment necessary for his digital duties.

While the ATO initially blocked his deduction for both occupancy and car expenses, the AAT ruled Mr Hall was entitled to claim these, recognising the unique pandemic circumstances and confirming his home was his main workplace for that income year.

“This matter is subject to appeal to the Federal Court of Australia,” an ATO spokesperson said.

“The ATO has published an interim decision impact statement which provides the ATO’s view on the implications of the tribunal decision pending the finalisation of the appeal process.”

The ATO’s interim statement highlights that expenses related to a taxpayer’s home, such as rent, are generally considered private and non-deductible. It notes, “the mere fact that a room in the house has been set aside during the circumstances of COVID lockdowns for work purposes is not sufficient to enable a deduction for a portion of the rent”.

On the issue of vehicle expenses, the statement clarifies the cost of travel from home to a regular workplace is “not deductible”, even if the employee works some hours from home on the day.

Michael Fox, principal of Michael Fox Arts Accountant & Valuer, told The Nightly: “Mr Hall is obviously a very detail-oriented man, and this always helps when dealing with the ATO. The actual facts of the case are peculiar to the pandemic, and worked in Mr Hall’s favour.”

Regarding eligibility for rent claims for employees: “Usually, self-employed taxpayers claim home office rent; otherwise, as an employee, you have to be required to work from home by your employer. Most employees would only claim the shortcut method of cents per hour. Claiming a portion of your rent requires that you use a room with a door that has no private usage whatsoever.”

“Mr Hall deliberately chose to live in an apartment with such a room that he could use as an office before he relocated to Melbourne.”

On why the ATO is moving quickly to overturn the decision: “The ATO has been actively encouraging people to lodge their own returns through myGov instead of using tax agents, who are more scrupulous in assessing claims,” Mr Fox said.

“A decision like this could lead to a marked increase in other work-related deductions by self-lodgers, which the ATO would find very hard to police.”

The ATO has warned taxpayers not to rush similar claims this year, noting they could face extra tax repayments if the decision is overturned.

With 31 per cent of Australian households renting, according to the 2021 Census, even a small fraction making such claims could cost the government billions.

The Federal Court ruling on the appeal is expected in the coming weeks, with significant ramifications for future work-from-home deductions.