Suppose an employee works from home and has set aside a room to be occupied for the “trade”, e.g. employment. In that case, they may be allowed to deduct certain home office expenses for tax purposes calculated on a pro-rata basis – provided that they meet the requirements as set out in the Income Tax Act (“the Act”).
Requirements for claiming home office expenditure
The Act sets out certain requirements which must be met in order to qualify for the deduction for home office expenses.
Firstly, the home office in question must be occupied for purpose of trade and it must be specifically equipped for trade. A trade includes employment and therefore employees may qualify for a deduction subject to certain limitations.
The home office must be regularly and exclusively used for purposes of the trade. It is important to note that it is not possible to define what would be acceptable to SARS as regular usage for trade purposes, as each individual tax submission will have to be evaluated on its own merits. Occasional use does, however, not qualify. No deduction will be permitted where it is evident that the taxpayer conducts any activities of a private nature in the part used for trade.
SARS has released a draft interpretation note No 28 (Issue 3) on the matter which sets out various examples to determine regularity and exclusivity tests.
As mentioned earlier, trade may constitute employment. There are, however, certain restrictions that depends on whether or not the income from employment is based mainly on commission.
For commission-earners, the income derived from this trade must be mainly from commission (that is, the commission must exceed 50% of the total income from employment or the office) or other variable payments based on the taxpayer’s work performance. In this instance the employee’s duties may not always be performed mainly in an office provided by their employer (e.g. travelling sales representatives who spend most of their time on the road visiting clients). The employee will still qualify for the deduction.
For employees who do not earn primarily commission, their duties must be performed mainly (that is more than 50%) in that part of the private premises occupied for purposes of trade (home office).
An employee will have to prove on a balance of probabilities that more than 50% of their duties are performed in the home office. Employers often issue letters to employees confirming that they performed their duties mainly in a home office. Still, the draft interpretation note specifically notes that SARS is unable to accept such letters.
Expenses in connection with the premises
Expenses in connection with a premises that would qualify for a deduction include items such as:
Insurance costs are generally not claimable for the following reasons:
One still needs to ensure whether certain sections of the Act would prohibit or limit these deductions, for example where something does not relate to the trade (home office) or is capital in nature.
The method for calculating home office expenditure
The tax deduction regarding home office expenditure is based on the area of the home utilised for trade and it is calculated on a pro-rated basis (square meters of the area of home office versus total square meters of your home).
The qualifying amount must be calculated as follows:
A/B x total costs, where:
Only expenses relating to the premises must be apportioned based on floor area (such as for example rent, interest on bond, rates and taxes, cleaning, etc.) Expenses that do not relate to the premises (such as wear and tear on equipment and furniture) do not need to be apportioned based on floor area.
Deductible home office expenses are a hot topic at the moment as the COVID-19 pandemic has forced many employees to work from home during the past year. One can be certain that the South African Revenue Service (SARS) will keep a close eye on individuals who claim these expenses as a deduction on their income tax returns and it is a reasonable assumption that these deductions will trigger verifications on the relevant income tax returns. Ultimately, the taxpayer needs to decide whether the tax benefit when claiming these deductions are worth the admin involved in convincing SARS that the expenses are valid and qualify as deductible home office expenses.