TAX BENEFIT OF WORKING FROM HOME
7 October 2020
On the 27th of March 2020, South Africa implemented its solution to the Covid-19 pandemic in the form of a Nationwide Lockdown. For the majority of South Africans, home was transformed into the workplace in a space of less than a week. While there is much debate as to the manner in which the Nationwide Lockdown was effected and its value regarding society and our economy, there may be an opportunity for some employees to claim their home office expenses as tax deductions for the 2021 tax year (1 March 2020 – 28 February 2021).
The Income Tax Act 58 of 1962 (the “Act”) affords specific taxpayers the opportunity to deduct their home office expenses should they meet the requirements in terms of section 11, 23(b) and 23(m) of the Act. The purpose of this article is to provide a broad overview of home office expenses as well as to demonstrate its practical application in non-elaborate detail.
Who can claim home office expenses?
The general rule in terms of claiming home office expenses, as provided for in the Act, is that a taxpayer will qualify for certain tax deductions if they have a home office that is specifically equipped for the purposes of the taxpayer’s trade and it is exclusively used for that purpose. It will not be adequate that the taxpayer occasionally uses their dining room table for work purposes or meets with clients in their lounge.
The interpretation of the Act, and more specifically section 23(b), provides for specific types of taxpayers who will be entitled to claim home office expenses. These are sole proprietors / independent contractors, employees whose income is mainly in the form of commission earnings (variable payments) and employees whose income is not mainly in the form of commission earnings (variable payments).
Sole proprietors / independent contractors
Private individuals who are not employed but operate their own sole proprietorship or as an independent contractor may claim pro-rata home office expenses provided that their home office is specifically equipped for the purpose of their trade and is regularly and exclusively used for purposes of their trade.
Employees who do not earn mainly commission income
If a taxpayer is employed and does not earn mainly (more than 50%) commission income, they may still be able to claim home office expenses if they work in a home office that is specifically equipped to perform their employment duties and they have worked in their home office for more than 50% of the tax year.
With the Nationwide Lockdown having been downgraded to Level 1 with effect from 21 September 2020, there is a high probability that many taxpayers who worked from home from end March 2020 to end September 2020, and those who are working on a rotational basis for the foreseeable future, may claim pro-rata home office expenses. This deduction will only be possible should the home office be specifically equipped for purposes of conducting their employment duties and used regularly and exclusively for that purpose.
These employees may also deduct the pro-rata expenses relating to rent, interest on any mortgage bond(s), rates and taxes and any other expense incurred in connection with the home.
Employees who earn mainly commission income
If a taxpayer is employed and earns more than 50% of their income in the form of commission or variable payments and conducts their employment duties mainly (more than 50%) from their home office, they will be entitled to claim the same pro-rata costs as above. In addition, these taxpayers may also claim commission-related business expenses such as stationery, telephone and data costs that they would normally incur when conducting their employment duties.
How do I calculate my home office expense deduction?
The home office claim is calculated in the form of a percentage of the square meterage of the home office over the total square meterage of the entire home. It is important to take note that certain costs are not subject to the pro-rata formula and should be excluded from the calculation (i.e. wear and tear which is specifically dealt with in section 11(e) of the Act).
How do I claim my home office expenses in my annual income tax return (ITR12 form)?
The home office expense deduction must be included under the section dealing with “Deductions” in the ITR12 form.
It is important to remember that when submitting your annual income tax return the South African Revenue Service (“SARS”) may request supporting documentation in order to validate your home office expense claim. In light of this, it is a wise practice to retain any invoices and statements of the expenses incurred and to prepare a spreadsheet with the number of days worked at home in that tax year (any communication instructing you to work from home during the Nationwide Lockdown and beyond, will assist in justifying the amount of days included in your spreadsheet).
Can I be reimbursed for the cost incurred in purchasing home office equipment?
If you purchased a home office asset in order to conduct your employment duties, for example a desk, and the asset remains your asset, the reimbursement of the cost incurred is a taxable benefit and will be subject to employee’s tax withholding (that is, the cost will be withheld as a credit against your income tax). If your employer has reimbursed you for the cost incurred, thereby now being an asset of your employer, the cost will not constitute a taxable benefit (this would however afford your employer, if VAT registered, to claim input VAT on the reimbursement).
Other consideration – capital gains tax
The flip side of claiming home office expenses is the effect of capital gains tax when selling the home. Upon the sale of a property a capital gains tax event arises and in the sale of a primary residence, the first R2 million in capital gains will not be subject to capital gains tax (the primary residence exclusion). However, if the homeowner uses a part of their home for business purposes and claims home office expenses, the primary residence exclusion will be reduced by taking into account the period for which home office expenses were incurred and the pro-rata size of the home office in comparison to the entire home. The effect of this reduction is a possible higher capital gain tax on the sale of the home.
In light of the above, it is imperative that taxpayers are aware of one of the benefits of working from home during the Covid-19 pandemic and it is advisable that professional advice should be sought in ensuring compliance with the relevant legislation when submitting your annual tax return.