When may you claim for working from home?
MAIN IMAGE: Thomas Lobban, Tax Consulting South Africa
The Covid-19 pandemic has meant that most businesses in South Africa, including estate agents, have needed to adopt new approaches to how they operate, which means the vast majority of employees are now working from home and will continue to do so for the foreseeable future.
This has led to many asking whether it is possible to claim a tax deduction for expenses incurred due to their working from home. The good news is that there is indeed a claim for so called “home office expenses” where one meets the requirements; however, this is limited in the case of an employee.
The general rule for deductions
The different circumstances in which a deduction will be allowed for a taxpayer in determining their taxable income are outlined in section 11 of the Income Tax Act.
The general rule is provided in section 11(a) of the Income Tax Act in particular, and states that the deduction is limited to instances where the taxpayer is carrying on a trade, which includes “every profession, trade, business, employment, calling, occupation or venture”. Further, the expenditure in question must have actually been incurred in the production of that taxpayer’s income.
In effect, employees and those who are self-employed and generally work from home may be able to claim a deduction for related expenses in order to reduce their overall tax liability, provided such expenses are incurred in terms of the work they do.
However, section 23(b) of the Act excludes the deduction of “domestic or private expenses”, which means that the circumstances in which one can claim a deduction in this regard are limited, especially in the case of an employee.
When does one qualify?
Home expenses are generally not considered “private or domestic expenses” where the expense is incurred for part of a premises that is occupied and specifically equipped for the purposes of trade, and which is used regularly and exclusively for such purposes.
Put differently, there must be a dedicated space in one’s home that is allocated solely for work purposes, such as a study, and which is used regularly for that purpose. This requirement will not be satisfied where, for example, one works at their dining room table. This will apply irrespective of the person’s trade; i.e., if they are a sole proprietor, freelancer or employee.
For employees, section 23(b) tapers the requirements further, depending on what type of employee a person is. A distinction is drawn between employees who derive their employment income mainly (more than 50%) from commission or other variable payments based on work performance, and other ordinary employees.
Employees: In case of the former, the employment duties must be performed mainly (more than 50%) outside an employer-provided office. In the case of an ordinary employee, the employee’s duties must be performed mainly (more than 50%) at their home office. In other words, an employee will be able to claim a deduction for their home office expenses if they work from home for more than 6 months out of the year of assessment – if lockdown in South Africa is counted from April 2020, this means that the deduction will be available to those working from home until at least October.
A commission-earning employee may claim a deduction for expenses in relation to telecoms, stationery, cleaning services and office equipment, as well as pro-rated (based on the amount that can be allocated to the home office) wear-and-tear, rates and taxes, rental payments, interest on one’s bond, cost of repairs to the premises and other expenses.
Section 23(m) limits the amounts that may be claimed by ordinary employees somewhat further. This provision determines that employees (other than commission-based earners) may only deduct very specific amounts, which include pro-rated deductions based on rent, interest on mortgage bond, repairs to the premises, rates and taxes, cleaning, wear-and-tear, and all other proportional expenses relating to their house. However, an ordinary employee may not deduct expenses relating to telecoms, stationery or repairs, for example.
Considerations on the future sale of one’s home
It should be borne in mind that, in claiming this deduction, one may possibly end up with a capital gains tax (CGT) liability, that would not otherwise be levied, when they sell their home.
Under normal circumstances, an exemption is applied in respect of the first R2 million of the capital gain realised upon the sale of one’s primary residence. However, this does not apply to that part of the home that is not a part of the primary residence per se.
This means that the same proportion of one’s home that is utilised as a home office may not be subject to the primary residence exemption and will be subject to CGT. In determining the proportion of the property that is not subject to the primary residence exemption, however, it is worth mentioning that consideration must nevertheless be given to the overall amount of time that the home office did form a part of the primary residence.
In effect, this would result in two separate CGT disposals in their tax return – one for the proportion of the home that constitutes the primary residence, and one for the proportion of the home which constitutes the home office.
It is critical to keep any documentation, such as invoices that relate to the expenses incurred, as SARS will likely ask for these upon assessment. The employee must also be able to submit the calculations that support the apportionment of the expenditure.
About the author: Thomas Lobban is a tax associate and registered tax practitioner with Tax Consulting South Africa. He obtained his LLB degree and LLM (tax) degrees from the University of Johannesburg. He completed his dissertation in the taxation of cryptocurrency, the first in South Africa to do so after the law change, and has since advised numerous clients on both the tax and exchange control aspects of cryptocurrency trading. His focus also lies in respect of international tax matters, including controlled foreign company rules, transfer pricing regulations, and correct company set up for cross border business.