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Tax Deduction for Home Office Expenses. Do You Qualify?

Tax Deduction for Home Office Expenses. Do You Qualify?

Grant Ward

Due to the coronavirus (COVID-19) pandemic many employees were required to work remotely from their homes during the lockdown period in order to limit the spread of the virus. This has created an opportunity for many employees who were not previously able to claim a tax deduction for home office expenses to do so in the 2021 tax year (1 March 2020 to 28 February 2021).
 
The Income Tax Act No.58 of 1962 (“Act”) allows certain individual taxpayers to deduct their home office expenses from their taxable income, provided that the requirements with reference to section 11(a) read in conjunction with sections 23(b) and 23(m) are all met.
 
Section 23(b) of the Act states that a tax deduction for home office expenses is only allowed:
  1. If the room is regularly and exclusively used for the purposes of the taxpayer’s “trade” which includes employment and is specifically equipped for that purpose. e.g., if an employee does not have a separate study or office available in their home with a desk, computer and so forth, home office expenditure will not be allowed as a deduction. The home office must be set up solely for the purpose of working.
  2. If the employee’s remuneration is only salary, the duties are mainly performed in this part of the home. It therefore means the employee performs more than 50% of their duties in their home office e.g., if an employee worked from home from 27 March 2020 (start of lockdown) to the end of September 2020 they may qualify for a home office expense deduction.
  3. Where more than 50% of an employee’s remuneration consists of commission or variable payments based on their work performance and more than 50% of those duties are performed outside of an office provided by their employer.
What constitutes home office expenditure?
 
SARS has confirmed that the type of home office expenditure referred to in section 23(b) is:
  • rent of the premises;
  • cost of repairs to the premises; and
  • expenses in connection with the premises.
In addition to these expenses, other typical home office expenditure may include –
  • Phones;
  • Internet;
  • Stationery;
  • Rates and taxes;
  • Cleaning;
  • Office equipment; and
  • Wear and tear.
In order to assist taxpayers, SARS released an updated draft Interpretation Note 28 on 14 May 2021 (click here for the document). In our view The Interpretation Note sets out very clearly what does and does not qualify for the tax deduction.
 
How do I calculate home office expenses?

The tax deduction is calculated for the area of the home utilised for trade e.g., employment purposes. Home office expenses are calculated on a pro-rated basis (square metres of area of home office versus total square metres of your home).
 
What is the method of calculating home office expenses?
 
Should a taxpayer qualify for a deduction in respect of home office expenses, the amount must be calculated on the following basis: A / B x total costs, where:
  • A = the area in m² of the area specifically equipped and used regularly and exclusively for trade e.g. employment
  • B = the total area in m² of the residence (including any outbuildings and the area used for trade in the residence)
  • Total costs = the costs incurred in the acquisition and upkeep of the property (excluding expenses of a capital nature). *
*Note that 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.
 
Capital gains tax impact:
 
It is important to note is that there is a downside to claiming home office expenditure when it comes to selling your primary residence. An individual is entitled to a primary residence exclusion. This exclusion can be used to set-off the capital gain arising on sale, up to the value of R2 million.
 
When a part of your primary residence is used for trade purposes (i.e. a home office) and a deduction is claimed for trade expenditure, this part of your primary residence is not covered by the primary residence exclusion (tainted) which may expose the individual to capital gains tax as the overall capital gain will need to be apportioned between its tainted and untainted elements.
 
Home office deductions are definitely something to consider for qualifying employees, provided that the requirements are met and careful consideration has been taken to the capital gains impact.
 
Due to the number of articles written about this deduction during lockdown SARS will investigate this deduction very thoroughly. We advise that you contact your nearest Moore office to guide you through this process.