An individual who operates as a sole proprietor is eligible for all deductions and allowances provided for in the Income Tax Act 58 of 1962 (the Act) with regard to their business expenses. An individual who is an employee however is limited in the deductions that may be claimed against their salary due to the operation of section 23(m) of the Act.
Private or domestic expenses do not qualify for a deduction in terms of the general rules (section 11(a)) as they are not incurred in the production of income and are specifically prohibited by section 23, however the Act does make provision for certain deductions to be permitted. Section 23(m) of the Act permits the following deductions for employees:
- Legal expenses;
- Depreciation;
- Bad debts;
- Provision for bad debts;
- Income protection insurance policy premiums;
- Home office expenses
- Pension contributions
- Retirement Annuity contributions
- Donations to Public Benefit Organisations
- Medical Expenses
This article will be focusing on the home office expenses. In KBI v Van der Walt [1]the court held that in order for the expenditure of a home study of an employee to be in the production of income, it was not necessary for the taxpayer to be bound by the terms of an employment contract to maintain a study at home. The taxpayer merely had to show that the expenditure was incurred bona fide for the more efficient performance of his/her duties.
What constitutes home office expenditure?
In order to calculate the allowable deduction the floor area of the study to the floor area of the premises e.g. house or flat needs to be determined. Then, the total expenses relating to the premises needs to be calculated. Typically, home office expenditure will be the type of expense referred to in section 23(b), namely:
- Rent of the premises;
- Interest on bond;
- Repairs;
- Rates and taxes;
- Water;
- Electricity;
- Cleaning;
- Security.
The amount that can be claimed as a deduction is the ratio of the floor area of the study to the floor area of the premises. E.g. if the floor area of the study is 10m2 and the floor area of the premises is 100m2 then 10% of the total expenses can be claimed as a deduction.
A home office deduction is determined by reference to section 11 read together with sections 23(b) and 23(m). This means that for a home office expense to be deductible the requirements of all three sections must be met.
Requirements of section 11
Section 11, in so far as it relates to home office expenses, makes no distinction between taxpayers in employment, taxpayers that are holding an office or other taxpayers. So long as the expense is not of a capital nature, it would not be difficult to show that a home office expense meets the requirements of section 11.
Requirements of section 23(m)
Section 23(m) is applicable if the taxpayer is in receipt of remuneration derived from employment or the holding of an office, unless the remuneration is derived mainly from commission based on sales or turnover. As far as home office expenses are concerned, the taxpayer will only be able to claim rental, repairs and expenses incurred in relation to a dwelling house or domestic premises under sections 11(a) and (d) and wear-and-tear allowances under section 11(e).
Requirements of section 23(b)
In order for the home office expense to qualify under this section the study must be regularly and exclusively used for the purpose of trade and specifically equipped for such purpose. In the case of an employee whose income is derived mainly from commission or other variable payments, the duties are mainly performed otherwise than at the employers premises or in the case of an employee, the duties are mainly (exceeding 50%) performed in the home study.
Conclusion
It is clear from the above that employees will generally not be able to claim home office expenses due to the restrictions in section 23(b). Individuals who are not employees will be entitled to claim the deduction so long as the study is used regularly and exclusively for their trade.
[1] 48 SATC 104, 1986 (4) SA 303 (T).