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If you run your business from a spare room or the kitchen table, a working from home tax deduction can take some of the sting out of your power and internet bills. The rules are stricter than most people expect, though. The ATO cares about how you use your home, what records you keep, and whether part of your home is a genuine place of business.
This guide sets out what the ATO says about home office deductions for sole traders and small business owners, using the ATO’s own pages as checked in October 2026.
What Is a Working From Home Tax Deduction?
The ATO splits home costs into two groups:
- Running expenses: the cost of using facilities in your home, such as electricity, phone, cleaning and the decline in value of furniture and equipment.
- Occupancy expenses: what you pay to own or rent your home, such as mortgage interest, rent, council rates, land tax and house insurance.
According to the ATO, you can claim additional running expenses from running your business at home, “even if it doesn’t have the character of a ‘place of business'”. Occupancy expenses are a different story, and we cover them below. If you are registered for GST and can claim GST credits, you only deduct the GST-exclusive amount.
Two Ways to Work Out Your Home Office Deduction
Most home-based business owners use either the fixed rate method or the actual cost method. Businesses with an area set aside as a place of business can also use the floor area method for running expenses.
The fixed rate method
You claim a set amount for each hour you work from home. As of October 2026, the ATO’s fixed rate method page lists 70 cents per work hour for the 2024-25 and 2025-26 income years (67 cents for 2022-23 and 2023-24). Check that page for the rate that applies to later years.
The rate covers:
- home and mobile internet or data
- mobile and home phone use
- electricity and gas for heating, cooling and lighting
- stationery and computer consumables, such as printer ink and paper.
You cannot claim those costs again separately. You can still claim the decline in value of items like desks, chairs and computers, plus any other running expenses the rate doesn’t cover, such as cleaning a home office. You don’t need a dedicated home office to use this method.
The actual cost method
You work out the real extra cost of each expense and claim the business portion. This takes more effort: you need bills and receipts for every expense, plus a reasonable way to split business and private use. For example, the ATO lets you work out the business share of an itemised phone or internet bill from a continuous 4-week period.
Fixed rate vs actual cost at a glance
| Fixed rate method | Actual cost method | |
|---|---|---|
| How it works | Hours worked at home x the ATO rate | Real cost of each expense x business share |
| Energy, phone, internet, stationery | Included in the rate | Claimed item by item |
| Furniture and equipment | Claimed separately | Claimed separately |
| Hours record | Actual hours for the whole year | Actual hours, or a representative 4-week period |
| Expense records | At least one bill for each covered expense | All bills and receipts, plus your workings |
Records You Need for a Working From Home Tax Deduction
This is where many claims fall over. For the fixed rate method, the ATO says you must keep a record of the actual hours you work from home for the entire income year, such as a timesheet, roster or diary. An estimate of your hours won’t be accepted. You also need at least one bill or receipt for each expense the rate covers, such as one quarterly electricity bill.
For the actual cost method, you need receipts and bills for each expense, a record of your hours or a representative 4-week diary, and notes on how you worked out the business portion.
The ATO’s home-based business expenses page says business owners need complete and accurate records for at least 5 years to support their claims.
Occupancy Expenses: When Your Home Is a “Place of Business”
Claiming part of your rent, mortgage interest or rates is only possible if an area of your home has the character of a “place of business”. The ATO lists these signs:
- It is clearly identifiable as a place of business, such as having a sign at the front of the house.
- It is not readily suitable or adaptable for private or domestic use.
- It is used exclusively, or almost exclusively, for the business.
- It is used regularly for visits by your clients.
A study you also use for homework, or a desk in the lounge room, usually won’t qualify. Occupancy expenses are generally worked out by the share of floor area used for business and the part of the year it was used that way. The ATO also notes that if the personal services income (PSI) rules apply to you, you may not be able to claim some occupancy expenses.
If your business is a company or trust
The ATO says a company or trust running a business from home should have a genuine, market-rate rental contract (or similar agreement) with the owner of the property. That agreement decides which expenses the business pays and claims. If you are weighing up structures, our guide to sole trader vs company covers the basics.
The capital gains tax catch
Occupancy deductions can cost you later. Normally, the main residence exemption means you pay no capital gains tax (CGT) when you sell your home. According to the ATO’s CGT page for home-based businesses, if part of your home is set aside exclusively as a place of business and you are entitled to claim occupancy expenses, you may only get a partial exemption.
The taxable share is generally the same percentage you could have claimed for mortgage interest, usually based on floor area. The ATO notes this applies even if you didn’t actually claim mortgage interest. There are no CGT implications if you only claim running expenses.
The ATO also warns that simply running a business from home will rarely make your home eligible for the small business CGT concessions. If you are thinking about claiming occupancy expenses, talk to your accountant first.
Does a Virtual Office Change Your Home Office Deductions?
No. A virtual business address gives you a professional street address for mail and registrations, but it doesn’t create home office deductions on its own. Your home office claims still depend on how you actually use your home and the records you keep.
Separately, the ATO’s list of business premises operating expenses includes “renting or leasing business premises”, so rent on an office such as a private office is the kind of cost the ATO describes as deductible. How a virtual office fee is treated in your own return is a question for your accountant. If you are unsure what a virtual office includes, read what is a virtual office, and for the bigger picture on home addresses, see running a business from home.
Getting Your Working From Home Tax Deduction Right
Keep it simple: start a log of your hours today, keep one bill for each running expense, and only look at occupancy expenses if part of your home is genuinely a place of business. A working from home tax deduction is worth claiming, as long as your records back it up.
This is general information, not tax advice. Check your situation with your accountant or the ATO.
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