The Impact of Home Office Expenses on Capital Gains Tax

Capital gains tax: consequences on the disposal of a primary residence used partially for purposes of trade[1]

In our previous article (link to Home Office Expenses) we explained the conditions to be considered when submitting Home Office expenses to SARS as part of an individual tax return. But does this benefit have any consequences to Capital Gains Tax?

For the purpose of Capital Gains Tax, the first R2 million of a capital gain or capital loss on the disposal of a primary residence must be disregarded. This means that if the proceeds in respect of a disposal of a primary residence are R2 million or less, the capital gain must be disregarded.

However, suppose 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. In that case, the primary residence exclusion of R2 million must be apportioned for non-residential use. 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 portion of the capital gain, and 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), it no longer qualifies as a “primary residence”.

Capital gains tax is payable on the business portion of the capital gain, whether or not 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.  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.

[1] Draft interpretation note 28 (Issue 3)