If an employee works from home and has set aside a room to be occupied for the purpose of “trade”, e.g. employment, 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 that must be met in order to qualify for the deduction of home office expenses.
Firstly, the home office in question must be occupied for the purpose of trade and it must be specifically equipped for the purpose of said trade. A trade includes employment and therefore employees may qualify for a deduction subject to certain conditions.
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 the purposes of trade, as each case will have to be judged on its individual 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.
Each case will have to be decided on its own merits as it is not possible to define what would be acceptable as regular usage for the purposes of trade. SARS has released Draft Interpretation Note No. 28 (Issue 3) on the matter that sets out various examples to determine regularity and exclusivity tests.
As mentioned earlier, trade may constitute employment. There are however certain restrictions that depend on whether the income from employment is based mainly on commission.
For commission-earners, the income derived from this trade must be mainly from commission (i.e., commission must exceed 50% of the total income from employment or the office) or other variable payments that are 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 his or her employer (e.g., travelling sales representatives who spend the majority of their time on the road visiting clients). The employee will still qualify for the deduction.
For employees who do not earn mainly commission, their duties must be performed mainly (more than 50%) in that part of the private premises occupied for purposes of trade (home office).
The onus is on the employee to prove, on a balance of probabilities, that more than 50% of their duties were performed in the home office. Employers often issue letters to employees confirming that they performed their duties mainly in a home office, but the draft interpretation note specifically states 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 confirm 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 in respect of 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 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 (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.
Capital gains tax consequences on the disposal of a primary residence used partially for purposes of trade
The first R2 million of a capital gain or capital loss on the disposal of a primary residence must be disregarded for capital gains tax purposes. This means that if the proceeds in respect of a disposal of a primary residence are R2 million or less, the capital gain must
However, if a primary residence has been used by a taxpayer partially for purposes of carrying on a trade, such as in the case of a taxpayer that makes use of a home office, then the primary residence exclusion of R2 million must be apportioned for the non-residential use; and the R2 million-proceeds rule for disregarding any capital gain, does not apply to the part of the premises used for purposes of trade.
The apportionment is based on the proportion of the floor area used for business and private use and must be applied to the total capital gain to arrive at a private, as well as a business portion, of the capital gain. If more than 50% of the property is used for trade (for example, if the home office takes up more than 50% of the property), then it no longer qualifies as a “primary residence”.
Capital gains tax is payable on the business portion of the capital gain, whether the taxpayer claimed, or was entitled to claim, a deduction against income in respect of home office expenses.
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, it is up to the taxpayer to decide whether the tax benefit when claiming these deductions are worth the administration involved in convincing SARS that the expenses are valid and qualify as deductible home office expenses.
Contact Jan-Louis Koen on 021 840 1600 or firstname.lastname@example.org to assist you with all your tax concerns.