Maximising Your Home Office Expenses: A Comprehensive Guide for New Zealand Residents

Understanding the tax implications of home office expenses:

When it comes to home office expenses, it's important to understand the tax implications and how they can benefit you as a New Zealand resident. Inland Revenue (IRD) provides guidelines on what can be claimed and the criteria that must be met. If you’re a business owner and use part of your family home for work, you can claim this as a business expense. To be eligible to claim home office expenses, there must be a link between using your home and the income generated by your business. This includes expenses such as rent or mortgage interest, rates, insurance, repairs and maintenance, and even internet and phone costs directly related to your business.

‍

Eligibility criteria for claiming home office expenses in New Zealand:

To ensure you meet the eligibility criteria for claiming home office expenses in New Zealand, there are a few key factors to consider. Firstly, you must be working on your business from home or using an area dedicated for business purposes. This could be using part of your garage for storing products, having a dedicated office or moving around a bit while working on your laptop for business purposes (i.e. using the lounge or kitchen table). There are a couple of different ways to calculate your home office expenses and they will depend if you use a dedicated space or not.

1. Calculating based on the size of your home office:

We recommend this option only if you have a specific area in your home dedicated exclusively to your business, such as a room used as your home office. This method can also be used if the room isn’t always used as a home office. For example, your home office is used as a guest bedroom room for part of the year. In this case, you would work out the time the room was used for business vs personal use…we won’t dive into this as it can get a bit confusing!

2. Calculating based on separately identifiable areas:

What if you haven’t got an area of your house solely dedicated to your business? Say, for example, you work from the kitchen or dining room table…

Firstly, you need to identify potential business areas within your home, start by identifying spaces used for business activities, such as a desk in the garage or a section of the living room. Exclude any non-business areas used for private purposes, like those with household furniture and appliances. From there you can measure the area(s) used for business purposes (in square metres) and apply the IRD's square metre rate to the business area. This method can get complex, read our other blog for more information.  

It’s important to remember that finding 'separately identifiable' areas involves a more detailed assessment of the space used for business purposes. This can be a complex calculation and may not have a significant impact on your tax deduction if this is a smaller area. We recommend you speak with your accountant or tax advisor about this method as it can get confusing!

‍

Types of home office expenses that can be claimed:

There are various types of home office expenses that you can claim as deductions in New Zealand. These expenses can include both direct and indirect costs related to your home office setup and operation, they include:

1. Rent or mortgage interest: If you're a homeowner, you can claim a portion of your mortgage interest as a deduction. If you're a renter, you can claim a portion of your rent. The percentage you can claim is based on the size of your home office compared to the total size of your home.

2. Rates, insurance, repairs, and maintenance: These expenses can be claimed based on the percentage of your home that is used for business purposes. For example, if your home office occupies 10% of your home, you can claim 10% of these expenses.
   
   

3. Office supplies and equipment: Any expenses related to office supplies and equipment, such as stationery, printer ink, computer software, and furniture can be claimed as deductions. Keep receipts and invoices for these expenses for documentation purposes. This doesn’t include the couch or coffee table if you sometimes work from the lounge - remember how we talked about clearly separating areas?
   ‍
4. Utilities: If you use electricity, heating, and internet specifically for your home office, you can claim some of these costs. This can be calculated based on the percentage of your home office compared to your entire home.

‍

Calculating and documenting home office expenses:

To calculate your expenses if you have a dedicated area used for business (i.e. a room), you need to determine the percentage of your home that is used for business purposes. One way to do this is by measuring the area of the room used as an office compared to the total area of your home. For example, if your home office is 10 square metres and your home is 100 square metres (not including outside), your home office occupies 10% of your home. This percentage can then be applied to various expenses to determine the amount you can claim. Remember, if you only used the room or area for business for part of the year, you can only count those home office expenses incurred during that period. This method takes into account all actual expenses. Another option is to use IRD’s square metre rate, we explain this in more detail here.

If you have a shared area that is used for both business and personal reasons (e.g. a desk in the lounge or you work from the kitchen or dining table), you will need to measure the ‘separately identifiable area(s)’. As above, you work out the area used for business purposes and divide it by the total floor area of the home to get the percentage of those expenses you can claim. Alternatively, you can use the square metre rate.

It's essential to keep records of all your expenses related to your home office as the IRD may require documentation to support your claims. This includes keeping receipts, invoices, and bank statements that clearly show the amount spent and the nature of the expense, this will make it easier to calculate and justify your claim.

‍

Tips for maximising your home office deductions:

Maximising your home office deductions requires careful planning and organisation. Here are some tips to help you make the most of your claim:

1. Keep accurate records: As mentioned earlier, proper documentation is key to maximising your deductions.

2. Separate your personal and business expenses: It's important to keep personal and business expenses separate. Have a dedicated bank account and credit card for your business to make it easier to track.

3. Consult with a tax professional or accountant: If you're unsure about any aspect of claiming home office expenses, it's always a good idea to consult with a tax professional. They can provide guidance specific to your situation and ensure you're making the most of your deductions.
4. ‍Stay up to date with tax laws: Tax laws and regulations can change, so it's important to stay informed. Regularly check the IRD website or consult with a tax professional to ensure you're aware of any updates or changes that may affect your home office deductions.

‍

Common mistakes to avoid when claiming home office expenses:

While maximising your home office deductions is important, it's equally important to avoid common mistakes that could lead to audits or penalties. You don’t want to be audited - trust us. Here are some mistakes to avoid:

1. Claiming personal expenses: Only claim expenses that are directly related to your home office and business activities. It's important not to claim personal expenses like a new phone that isn’t used for business purposes or a fancy coffee machine for the kitchen. Claiming personal expenses can raise red flags with the IRD.

2. Overestimating the size of your home office: Be accurate when calculating the size of your home office. Overestimating the percentage can lead to inflated deductions and potential penalties. If the size of your home office is more than 25% of your home, there is a good chance that IRD will ask for evidence.

3. Not keeping proper records: Proper documentation is essential for supporting your claims. Failing to keep records can result in the disallowance of your deductions.

Ignoring tax laws: Stay informed about tax laws and regulations to ensure you comply. Ignorance of the law is not a valid defence if you're audited, it’s important to understand what you’re entitled to. It’s a good idea to talk to us about it.

‍

Real-life examples of successful home office expense claims:

To illustrate the benefits of maximising home office expense claims, let's explore a few real-life case studies:

1. Sarah is a freelance graphic designer who works from her home office. She uses a spare room exclusively for her business activities and has accurate records of her expenses. By claiming a portion of her rent, rates, and office supplies, Sarah can significantly reduce her taxable income and increase her savings.
   

2. John is an owner of a limited liabilty technology company. He has a dedicated home office and keeps detailed records of his expenses. By claiming a portion of his mortgage interest, utilities, and depreciation on his office equipment, John can offset some of the costs associated with working from home.

These case studies demonstrate how maximising home office expense claims can have a significant impact on your tax liability and overall financial well-being.

‍

Take advantage of your home office expenses (within the boundaries):

Don't miss out on potential tax savings! Get ready to turn your home office into a valuable asset and make the most of your working-from-home experience in New Zealand. Remember to consult with a tax professional if you have any doubts or questions about claiming home office expenses. Everyone’s situation is different, so it’s important to accurately identify what you can claim. Feel free to reach out to us with any questions here!

‍