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Home Office Tax Deductions and Expenditures

Home Office Tax Deductions and Expenditures

Reader Enquiry:
 
I am a permanent employee earning a fixed salary. As I work mainly on my laptop, my employer instructed me to work while staying at home from April 2020 to December 2020. Can I claim a tax deduction for home office expenses and if so, to what extent and how do I go about doing this?
 
Please note:
  • This article has been written with our reader in mind (salaried employee) and does not cater for other income types such as commission earners, independent contractors or sole proprietors etc.
  • Any reference to “the Act” refers to the Income Tax Act No.58 of 1962, as amended.
 
Moore Tax Team Answers:
 
This enquiry is quite topical around the braai area these days and most taxpayers have, at minimum, thought about the idea of claiming such a tax deduction. With most South Africans being instructed to work from home since the inception of Level 5 (Lockdown – not Load shedding!) on 27 March 2020, the 2021 year of assessment (1 March 2020 – 28 February 2021) brings with it the possibility of an additional tax deduction in the form of home office expenditure.
 
Our reader’s question can be analysed and answered in the following manner:
 
Am I eligible to claim a tax deduction for home office expenditure?
 
Section 23(b) of the Act provides that a tax deduction for home office expenditure will only be allowed if both of the following requirements are met:
 
  1. The part or area of the home used by the taxpayer while working from home must be specifically equipped for purposes of the taxpayer’s trade and regularly and exclusively used for such purposes
 
This requirement entails that the area must be specifically tailored to the employee’s type of trade. Furthermore, the area must be exclusively utilised for the purpose of his/her trade. For this reason, a kitchen or living room area which was temporarily utilised while working from home would not meet the aforementioned requirement as the area was also used for private purposes.
 
In order to meet this requirement, a specific room or area in the home must be set up for the sole purpose of working – ie. a home study. As an example, a bedroom with a bed and desk area will not meet the minimum requirements as the room has a mixed purpose.
 
For the purposes of this article, we will assume that our reader had a spare room in his home, which he/she converted into a home study during lockdown and which was solely utilised during the April – December period to conduct the duties of his/her employment.
 
  1. The employees’ duties are mainly performed in such part of the home
 
In order to meet this requirement, there must have been communication (preferably written) between the employer and the employee instructing the employee to perform his/her duties at home.
 
Furthermore, it is critical that the employee be considered to have performed his/her duties “mainly” from his/her home. To this end, the SARS has recognised that for purposes of a year of assessment it would entail that more than 50% of the time spent performing his/her duties was spent at home (ie. more than a six month period during the year of assessment).
 
As our reader performed his/her duties while staying at home during April 2020 – December 2020, the six-month requirement has been met.
 
What is the scope of home office expenditure?
 
Issue 2 of Interpretation Note No.28, published by the SARS, lists the following expenses as acceptable home office expenditure:
 
  • Rent of the premises;
  • Interest on bond;
  • Cost of repairs to the premises;
  • Phone costs;
  • Stationery;
  • Rates and taxes;
  • Cleaning;
  • Office equipment; and
  • Wear and tear (on qualifying assets*).
 
Further to the above, the following costs may also be considered:
 
  • Internet (ADSL/Fibre) costs;
  • Water and electricity;
  • Security costs; and
  • Insurance.
 
*Allowance assets such as desks, office equipment, computer equipment etc. all have different wear and tear periods (ie. the number of years over which the value of an asset may be claimed as a tax deduction).
 
Interpretation Note No. 47, however, allows for any individual asset below R 7 000 to be claimed in a single year of assessment. It is important to note that the R 7 000 limit applies only to an asset that can operate on its own (ie. a computer screen and computer box are different items whereas a laptop screen and the laptop itself is one asset).
 
How do I calculate the tax deduction?
 
The tax deduction is only available for the area of the home that is used for employment purposes. Accordingly, the home office expenditure must be calculated on a pro-rata basis for tax purposes.
 
An acceptable method is to apply the square meterage of the area of the home used for employment purposes vs the total square meterage of the home.
 
As an example:
 
If our reader’s home study is 20 m² and the home as a whole is 200 m², it means that he/she is occupying 10% of the square meterage of the home for employment purposes. Accordingly, the total home office expenditure (as listed above) may be added together and multiplied by 10% to get a pro-rata portion of the expenditure incurred in relation to the area used for employment purposes. The value calculated represents the potential tax deduction.
 
How do I actually claim the tax deduction?
 
Once the tax season for the 2021 year of assessment opens a person’s tax return may be completed as usual with the addition of including a tax deduction for home office expenditure in the “Other deductions” section of the ITR12 (tax return for an individual).
 
What else should I consider?
 
When a person’s primary residence is disposed of such disposal may give rise to a capital gain event (ie. a profit is generated on the disposal of the home). To the extent that such gain is less than the ‘primary residence exclusion’, no tax is levied. The ‘primary residence exclusion’ allows for the first R 2 million in capital gains to be tax free.
 
Should there be an area of the home that was previously used for purposes of the owner’s trade (ie. such as when working from home), such an area would not be eligible for the primary residence exclusion.
 
For example:
 
In addition to the facts outlined in the first example above, imagine our reader sold his/her home after having owned the home for three years and generated a R 1.8 million capital gain. During the three-year period, our reader utilised an area in the home for purposes of his/her employment for nine months (April – December).
 
The tax implications are as follows:
 
R 1 800 000 * 20 / 200 * 9/36 = R 45 000
R 45 000 – R 40 000 (annual capital gain exclusion for natural persons) = R 5 000
 
R 5,000 * 40% (capital gain inclusion rate) = R 2 000 taxable income
R 2 000 * 45% (maximum marginal tax rate) = R 900 tax due and payable
 
Therefore, even in quite severe circumstances - where a significant capital gain is made in a short period of time - the tax implications are limited. Therefore, a tax deduction for home office expenditure remains a viable option as capital gains are included at a 40% inclusion rate and thereafter taxed, while home office expenditure is claimed without any dilution of the value through an ‘inclusion rate’ (ie. 40%).
 
Which documents may SARS request?
 
The onus of proof lies with the taxpayer and to that extent we would advise our readers to carefully consider, document and calculate their potential home office tax deduction before completing the ITR12.
 
We propose that the following documents, at minimum, are kept:
 
  • Letter or email from the employer instructing the employee to work from home;
  • Confirmation of the date when the employee returned to the office;
  • Proof of expenditure incurred (bank statement, agreement, invoice or statement);
  • Floor plan of the home with square meterage clearly reflected and area marked which was used for purposes of trade;
  • Detailed sheet reflecting:
    • All expenses incurred (as listed above);
    • A calculation of square meterage for the pro-rata portion of the home used for trade;
    • How the pro-rata portion is applied to the total expenditure incurred; and
  • Any further evidence to substantiate how the area was specifically equipped and used for employment purposes exclusively (such as a photo of the area).
 
Should you require assistance with your tax return or tax calculation for the 2021 year of assessment, please feel free to contact your nearest Moore Office.