The South African Revenue Services has previously allowed the deduction of home office expenses in the determination of taxable income where taxpayers earn mainly commission or are independent contractors and freelancers.
However due to COVID-19, the work environment was forced to make certain changes more rapidly.
“Many employees were forced to work from home, either on a full time or part time basis,” said Elizabete Da Silva EY Executive Director for People Advisory Services.
“With the change in work culture and remote working, the question was raised by South African taxpayers whether they would be permitted to claim a deduction relating to expenditure incurred in respect of their home office, if they were salary workers.”
In normal working conditions
The situation is different for salary workers, whom in order to claim any home office expenses, the below stringent requirements must be met –
- The part of the home, i.e., the office space, for which a claim is submitted must be occupied for purposes of a trade (which includes employment).
- The office occupied must be specifically equipped for purposes of the trade, e.g. a home study, with a desk, computer, and so forth.
- The employee must regularly and exclusively use the office for business purposes, i.e. it cannot be used for private purposes. If an employee does not have a separate study or office available in their home, home office expenditure will not be allowed as a deduction.
- Employees who do not earn commission but who spend the majority of their time on the road visiting clients, perform their duties mainly at their clients’ premises and as a result they do not qualify for a deduction.
- The employee’s duties must be performed mainly, i.e., more than 50%, in their home office.
- The employer must allow the employee to work from home.
It is not difficult to show that a home office expense meets the requirements of the Income Tax Act (ITA), to the extent that the expense is not of a capital nature. This is applicable regardless of whether the taxpayer is in employment, or holding an office or other taxpayers.
Qualifying expenditure under COVID work from home
Normal salary employees are allowed to claim for working at home but will be limited the following pro-rated expenses:
- rent of the premises;
- interest on a bond;
- cost of repairs to the premises;
- rates and taxes;
- other expenses in connection with the premises;
- office equipment; and
How to calculate your deduction
- Calculate the area of your home office as a percentage of the total area of your home.
- Apply this percentage to the total expenditure in respect of the home, e.g. rent, bond interest, water and electricity, rates and taxes, maintenance.
- Add any other allowable expenditure, e.g. stationery, wear and tear, etc.
- Ensure the calculation is available for SARS inspection, along with all supporting documents (invoices, bond statement, municipal bill, rental agreement etc.).
Capital gains tax (CGT) impact
“When selling your home/primary residence, an individual is entitled to what is known as the primary residence exclusion. This exclusion can be used to set-off the capital gain/loss arising on sale, up to the value of R2 million,” Da Silva.
It is important to note that when a part of your home is used for trade purposes (i.e. a home office) and a deduction is claimed for trade expenditure, this part of your home is considered tainted for capital gains tax purposes.
Upon the sale of your home the overall capital gain/loss will need to be apportioned between its tainted and untainted elements. This apportionment is done by taking into consideration the portion of the home being used for business/trade purposes and the applicable period claimed.
The primary residence exclusion can only be set-off against the untainted portion of the capital gain/loss and the tainted portion of the capital gain must be fully brought to account.
“In the recent budget address, National Treasury have commented that in light of the significant migration to working from home over the past year, they will be reviewing current travel and home office allowances to investigate their efficiency and equity in application,” Da Silva concluded.
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