Home office expenses for work from home employees

Have you been working from home? Can you claim a tax deduction? Is it worth the effort?

These are questions that have no doubt been discussed around the virtual water cooler or braai.  When South Africa went into national lockdown on 27 March 2020 it was initially intended to last for 21 days, non-essential employees were sent home and were required to work from home.   

Fast forward over 15  months later and the landscape for salaried employees has probably shifted forever.  Flexible work arrangements and remote working has become the new norm as the requirements of employers and employees have changed due to the COVID-19 pandemic.

In an earlier article published on our website in August 2020 the topic of “Home office deductions and the lockdown” was covered extensively. However, the South African Revenue Service (SARS) has recently issued Draft Interpretation Note 28 (Issue 3) – Deductions of home office expenses incurred by persons in employment or persons holding an office (IN28).  The update has been eagerly awaited by taxpayers who have been working from home due to the COVID-19 pandemic.

Proposed changes to Interpretation Note 28 (Issue 3-Draft)

With the proposed changes it is clear that SARS will implement a tougher approach in interpretation which will greatly limit the extent to which individuals will be able to claim their home office deductions. Anyone believing that just because they have been “forced” to work from home and should automatically be entitled to claim a home office deduction, must think again. The proposed changes are a lot stricter.

Types of taxpayers

The ability to claim a deduction for home office expenses in calculating one’s taxable income is different for commission earners compared to non-commission earners. For commission earners to qualify, their commission income must exceed 50% of their total income. For employees who do not earn mainly commission, their duties must be performed mainly, that is, more than 50% from an exclusively dedicated area of their home. The other main requirements that must be met are:

  • the home office must be regularly and exclusively used for trade purposes, and
  • the home office must be specifically equipped for purposes of the individual’s trade,
  • the home office cannot not be used as a spare bedroom or playroom for the kids and the dining room table does not constitute a “home office”.

It is important to bear in mind that the law governing the deductibility of home office expenses has not changed. With more people working from home, SARS has issued Draft IN28 (Issue 3) to provide clarity on the deductibility of home office expenses and to highlight the importance of the requirements that a home office must be a dedicated space/room used mainly and solely for this purpose for it to be regarded as a home office.

In recent media articles, SARS has been quoted as saying “full-time employees can also claim if they worked from home for at least six months of the tax year. This means that you would have to work from home at least until the end of September, if you left the office at the start of the national lockdown. If an employee’s duties are mainly performed from their home, they will be able to claim some expenses”.

Where an employee’s remuneration consists of only salary income and more than 50% of their duties are performed mainly from a room exclusively used and specifically equipped for the purpose of their trade, they then can claim a deduction for home office expenses.

The onus will be on the employee to prove that more than 50% of their duties have been performed from their home office. If any employee wants to claim for these expenses, then supporting documents such as invoices, statements, proof of payments must be retained together with a schedule of the actual days spent working at home during the tax year. A letter from your employer stating your changes in working conditions while under lockdown would support justifying the claim. It will be up to the employee to confirm that:

  • they are permitted to render employment services away from the employer’s premises, and
  • they were not present at their employer’s premises for the required number of days.

Allowable expenses in connection with the premises

Typically, SARS would allow the following home office expenses incurred in the production of income:

  • rent of the premises,
  • cost of repairs to the premises, and
  • expenses in connection with the premises

Typical expenses that could be incurred in maintaining a home office include the following, of which not all are tax deductible:

  • repairs to the home office
  • phones
  • internet costs
  • stationery
  • interest on the mortgage bond
  • rates and taxes
  • other municipal service charges such as sewerage and refuse
  • levies
  • electricity
  • cleaning costs
  • insurance

Expenditure such as phone costs (including the monthly charges), stationery, furniture, and computer and communication equipment are not incurred in connection with the premises and fall outside of the scope of what is permitted. Equipment may, however, qualify for a wear-and-tear allowance.

It is also important to note that insurance costs will generally not be deductible. Bond insurance is considered a life insurance product and cannot be deducted and household insurance relates to the contents of the premises and not the premises itself. The only insurance cost that would be deductible is home-owners insurance which covers buildings.

Another important factor to note relates to fibre optic cabling that taxpayers have installed to their homes.  Fibre may be used, in part, for purposes of working from home. Considering the way most of these contracts are set out, the initial set up costs and ongoing subscriptions are generally not deductible. These restrictions will also apply to other telecommunication expenses.

SARS have recently added a new web page pertaining to home office expenses.

See: https://www.sars.gov.za/types-of-tax/personal-income-tax/tax-season/home-office-expenses/

Regularity, exclusivity and mainly tests

To reiterate, expenses related to a home office will be allowed as a deduction if the part of the home is specifically equipped for purposes of the taxpayer’s trade and regularly and exclusively used for such purposes. Employee’s duties must have been mainly i.e., >50% of the time performed in the home office and fitted with the instruments, tools and equipment required to conduct their trade.

It is important to bear in mind is that for a couple who are both required to work from home and share their office space to perform their duties, neither of them will be allowed to claim a home office deduction. Since both are sharing the home office space, it has not been occupied exclusively for either’s trade. The home office is partially used for the purpose of each one’s trade and therefore, neither of them may claim a home office deduction.

Apportionment method

In determining the deduction that may be claimed for expenditure incurred in respect of a home office, both the apportionment ratio and the expenditure that is subject to apportionment must be determined.

SARS accepts the apportionment based on floor area of the premises as a reasonable method to calculate the proportion of expenses attributable to part of the home used for purposes of trade. The taxpayer needs to determine the size of the office floorspace in relation to the whole house. This ratio is then used to apportion the allowable expenses in relation to the portion of the house being used as an office. Once again, the onus of proof is on the taxpayer to prove the exact floor area of the home and the part being used as the home office.

CGT consequences on the disposal of a primary residence

The first R2 million of a capital gain or capital loss incurred on the disposal of a primary residence must be disregarded for CGT purposes.

However, in the case where a primary residence has been used partially for the purposes of a trade, the R2 million primary residence exclusion must be adjusted for the period the office space was used for purpose of the taxpayer’s trade. CGT will be payable on the portion of the home used for business/trade purposes. Also, if >50% of the property is used for trade, then it no longer qualifies as a primary residence and the R2 million primary residence exclusion falls away. 

Also, important to keep in mind is that CGT will be payable on the business portion of the capital gain irrespective of whether a taxpayer has claimed or was entitled to claim a home office deduction. It is clear that a dedicated space for work purposes will impact capital gains tax when selling your home.

In closing

The notion of claiming a home office deduction is not as clear cut and as simple as it may seem. There is no doubt that SARS will be reviewing these claims with a “fine tooth comb” and that they intend adopting a very strict interpretation and, in the process, limit the extent to which individuals can claim the home office deduction. It is disappointing, since many taxpayers hoped to be able to claim a deduction for at least some of the additional costs they had to incur to continue working through the pandemic. The due date for public comment on the draft IN28 was 14 June 2021 and it will be interesting to see whether SARS will be persuaded to relax their stance.

Taxpayers who plan to claim their home office expenses must be prepared for lengthy verifications and perhaps even audits by SARS. There will likely be far more claims than ever before, and it will be interesting to see firstly how SARS manages the increased volume and secondly, from a practical perspective, how they anticipate determining whether a workspace was used regularly and exclusively for purposes of the taxpayer’s work. 

The onus will be on the taxpayer to prove that the expenses they are claiming are valid and true. It is imperative that taxpayers maintain good records by keeping all relevant supporting documents of their claims (invoices, bond statements, municipal bills etc.) and any applicable calculations should SARS request this information, which is highly likely.

At the end of the day, it is up to the taxpayer to decide whether the tax benefit is worth all the admin, and it is advisable that taxpayers who do want to proceed, should do so cautiously and should seek the assistance of a registered tax practitioner.  

Alexandra Gomes

Senior Manager :Tax, Cape Town

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