The COVID-19 pandemic has necessitated many employees to work remotely from their homes during the lockdown period. This in turn has meant that employees had to ensure that a space, or part of their home, was set up in such a manner that it was conducive for them to work from home effectively and productively.
As a result, many employees have over the last few months incurred additional expenses that they would not have ordinarily incurred had they continued to work from the employer’s office. Since some of the cost of doing business has essentially been transferred from the employer to its employees, many employees are now assessing whether they would be able to claim certain of these expenses incurred in connection with the running of their home office as a tax deduction.
What constitutes home office expenses? Home office expenses will typically include rental paid in respect of your home (if you rent your home), rates and taxes, interest on the property bond, cost of repairs to the premises, cost of stationery, office equipment, cost of business calls made from your private home telephone, cleaning and other expenses in connection with the domestic premises etc.
In addition, wear-and-tear allowances in respect of assets used for purposes of the home office may also qualify for a tax deduction.
What requirements must be met for home office expenses to be deducted for tax purposes? If you are required to work at home and you have set aside a room or part of your home to be occupied for purposes of your “trade”, you may be allowed to deduct certain home office expenses for tax purposes calculated on a pro-rata basis. A room or “part” of your home or dwelling will be considered to be occupied for the purposes of trade if both of the following requirements are met:
- Such part is specifically equipped for the purposes of your trade, namely your employment, profession, etc.; and
- Such part is regularly and exclusively used for the purposes of your trade.
Importantly, in addition to the above requirements, should the room/part of your home/dwelling meet the above requirements and your trade constitutes employment or holding of an office (i.e. you are a salaried employee), a tax deduction will only be granted to you in respect of your home office expenses if:
- the income from your employment or office is derived mainly (i.e. more than 50%) from commission or other variable payments and you do not perform your duties mainly (more than 50% of the time) in an office provided by your employer; or
- you mainly (more than 50%) perform your duties in your home office (i.e. that room/part of your home/dwelling that is occupied for purposes of trade). No deduction is allowed when salaried employees perform only some duties at home, but work mainly from an office provided by their employers (such as teachers, for example).
Tax tips – Home office expenses
- It is apparent from the above that generally, relatively few employees (who earn salary income only or no/limited commission income) would qualify to claim a tax deduction for home office expenses. You should therefore only claim such a tax deduction if you are able to demonstrably prove to the South African Revenue Service (SARS) that you have met the above requirements. If you unable to do so, rather err on the side of caution and do not claim the tax deduction.
- Be sure to document in your employment contract/agreement with employer that you are required to use a room or part of a room in your house for trade/business purposes. This will strengthen your tax position should SARS request you to prove this. If you are a salaried employee who qualifies for a home office tax deduction, you should ideally receive an allowance from your employer against which you can claim the tax deduction in your tax return.
- You need not necessarily set aside an entire room for use as a home office. You may set aside only part of a room, provided that part is specifically equipped for the purposes of your trade and regularly and exclusively used for this purpose.
- Household expenses that may be included in your home office tax deduction include your bond interest (or if you are renting a house, the rent payable by you), rates and taxes, electricity, insurance, domestic worker’s wages, cost of repairs etc. incurred in respect of the home office. In addition to household expenses, other amounts that may be claimed include wear and tear on furniture and fittings and equipment used in your office for business purposes. The cost of these assets may be written off over their anticipated useful lifespan for tax purposes. The cost of business calls made from your private home telephone line may also be claimed as a tax deduction.
- Your tax deduction for home office expenses is generally calculated on a pro-rata basis taking into account the size of the home office (namely, that part which meet the above requirements) relative to the size of your entire home (in square metres).
- It is important to note that claiming a tax deduction for home office expenses may have adverse capital gains tax implications when you sell your home. This is because any capital gain derived upon the sale of the property will be apportioned with reference to the extent to which the property was used for business purposes and the R2m ‘primary residence’ exclusion (for natural persons and special trusts) will only be applied to the portion of your home relating to domestic use.
- Capital expenditure – Note that whether or not an employee’s remuneration is derived mainly from commission, an expense that is of a capital nature that does not qualify for a wear and tear allowance – e.g. buildings and other structures of a permanent nature – may not be deducted as home office expenditure for tax purposes. The cost of any portion of the employee’s domestic premises and improvements thereto may, therefore, not be deducted. Note that as the distinction between a deductible repair and an improvement is sometimes difficult, it is recommended that professional advice be sought in the case of uncertainty.
Given that most salaried employees are required to work from home and would likely not be able to claim a tax deduction for home office expense based on the legislation as it currently stands, a proposal has been submitted by various stakeholders to National Treasury, requesting that relief be provided to taxpayers who are forced to work from home and who incur business-related expenditure as a result.
To avoid taxpayers having to keep detailed records, it has been proposed that a deemed tax deduction be permitted, for example, by permitting taxpayers working from home to claim an income tax deduction at a prescribed rate per hour.