Home office deductions and income tax

Introduction

Commission earners can claim the non-capital home office expenses they incur in the production of income as home office deductions when submitting their annual income tax returns.  There are however some factors to consider before claiming this deduction.  In this article we will briefly look at a few of the requirements to claim the deduction and the implications thereof.

Types of commission earners

It is important to distinguish between the types of commission earners as it affects what is allowed under the home office deduction formula.  Commission earners are classified as follows:

1. Individuals who earn more than 50% commission or another variable form of remuneration which is based on work performance;
2. Individuals who are normal salaried employees and who earn commission or another variable form of income constituting less than 50% of their total remuneration.

Qualifying criteria for the home office

The home office has to comply with the following criteria:

	Individuals who earn >50% commission / another variable form of remuneration	Individuals who are normal salaried employees and earn < 50% commission / another variable form remuneration
The employee must be permitted by his/her employer to work from home.	No	Yes
The employee must not be provided with an office by his/her employer.	Yes	No
The employee must spend more than half of their normal working hours working from the home office.	Yes	Yes
The home office must be a dedicated, separate space used exclusively for work purposes and must be maintained as such.	Yes	Yes
The home office must be specifically equipped for the trade of the employee, fitted with the relevant instruments, tools and/or equipment required for the employee to perform his/her work.	Yes	Yes

Allowable deductions

The following home office expenses are allowed as deductions:

	Individuals who earn >50% commission / another variable form of remuneration	Individuals who are normal salaried employees and earn < 50% commission / another variable form remuneration
Property rent	Yes	Yes
Interest on a mortgage bond	Yes	Yes
Repairs and maintenance to the premises	Yes	Yes
Rates and taxes	Yes	Yes
Utilities	Yes	Yes
Depreciation on office equipment (the applicable write-off periods apply)	Yes	Yes
Cleaning expenses	Yes	Yes
Telephone costs	Yes	No
Stationery	Yes	No
Accounting & legal costs	Yes	No
Sales & marketing costs	Yes	No
Entertainment expenses	Yes	No
Travel expenses	Yes	No
Postage & couriers	Yes	No
Repairs to office equipment.	Yes	No

Sole proprietors and freelancers who work from home are not subjected to these limitations and can claim all their non-capital home office expenses incurred during the production of income as a home office deduction.

The deduction formula

As only a small section of the home is used as a home office, the taxpayer cannot claim the full expense incurred as a home office expense tax deduction but rather only a portion as it relates to the home office.  The portion of the claimable expense will depend on the ratio of the home office floor space to the total floor space of the home.  Begin by dividing the total floor space of the home office by the total floor space of the home and convert this to a percentage by multiplying it by a factor of 100.  Apply this percentage to the allowable expenditure in order to calculate the portion which qualifies as an allowable tax deduction.

Example:

More than 50% of Jeff’s income constitutes commission.  His employer does not provide him with an office, he mainly works from home and his home office complies with the requirements of the act.  The following expenditure was incurred by Jeff during the tax year:

• Property rental – R 100 000
• Utilities (water and electricity) – R 10 000
• Cleaning costs – R 5 000
• Stationery (used solely for work purposes) – R 1 500
• Telephone and internet (80% business use) – R 4 000
• Entertaining clients – R 15 000
• Travel expenses (business use) – R 25 000

If Jeff’s home office constitutes 25 sqm of his house of 200 sqm, the qualifying deduction is limited to 12.5% (25 / 200 x 100) of the relevant expenses.

The allowable deduction will look as follows:

• Property rental – R 100 000 x 12.5% = R 12 500
• Utilities (water and electricity) – R 10 000 x 12.5% = R 1 250
• Cleaning – R 5 000 x 12.5% = R 625
• Stationery – R 1 500 x 100% = R 1 500
• Telephone and Internet – R 4 000 x 80% = R 3 200
• Entertaining clients – R 15 000 x 100% = R 15 000
• Travel expenses – R 25 000 x 100% = R 25 000

Total allowable deduction = R 59 075.

Supporting documents

When claiming deductions always ensure supporting documents in the form of schedules, invoices, receipts, statements of accounts, etc. are available and retained for a period of five years.   Also prepare an apportionment calculation which reflects the ratio of the home office to the total home and show how this ratio was applied to the expenses claimed.

Home office deductions and Capital Gains Tax

It is important to note in the event the taxpayer is the property owner, claiming home office expenses as a tax deduction will impact the capital gains tax (CGT) when/if the taxpayer decides to sell the property.  This article does not deal with Capital Gains Tax in detail however we will briefly touch on the impact claiming this deduction will have on Capital Gains Tax.

Example:

Jeff purchased the property in our previous example for R 1.3 million on 1 March 2015.  He added a home-office to the property to the value of R 200 000 on 1 March 2018.  Jeff sells the property, which is his primary residence, for R 3.5 million on 1 March 2020.  Jeff owned the home for 5 years and claimed the home office deduction for 2 tax years.  Keep in mind 12.5% of the primary residence was utilised for business purposes, the first R 2 million in proceeds on the sale of the primary residence is exempt from Capital Gains Tax, the annual exemption for natural person is R 40 000 and the Capital Gains Tax inclusion rate for natural persons is 40%.

The calculation will look as follows:

Proceeds		R 3 500 000
Less Base cost	(R 1 300 000 + R 200 000)	R 1 500 000
= Capital gain	(R 3 500 000 – R 1 500 000)	R 2 000 000
Amount subject to CGT	R 2 000 000 x 12.5% x 2/5	R 100 000
Primary residence exclusion	R 2 000 000 – R 100 000	R 1 900 000
Less annual exclusion	R 40 000
= Total Capital gain	R 100 000 – R 40 000	R 60 000
CGT payable	R 60 000 x 40%	R 24 000

We cannot stress the importance of consulting with your tax advisor prior to claiming the home office expense as a tax deduction enough.  They will be able to determine if it would be a beneficial tax saving for you in the long run.

Home office deductions and employer reimbursements

The last aspect we would like to briefly cover in this article is employer reimbursements for work-related costs.  This can include stationary, telephone, internet, etc.  The reimbursement of actual costs is not regarded as income, does not have to be declared as income and does not attract a tax liability if:

• the expense was incurred on instruction of the employer,
• the expense was incurred for the trade of the employer,
• the employee has to prove to the employer that the items purchased was only used for furthering the trade of the employer.

Keep in mind not to claim these reimbursed costs as a tax deduction either as it will be an expense claimable by your employer.

Home office deductions and the Covid-19 lockdown

Many employees have been forced to work from home amid the outbreak of the Corona virus pandemic resulting in additional expenditure being incurred by employees to setup a home office.  In some instances, employers assisted employees by contributing towards or bearing the costs of setting up these home offices.  The latter of which is regarded as a taxable fringe benefit in the hands of the employee.

The draft Disaster Management Tax Relief Bill has provided little to no tax relief for salaried individuals.  SAICA and SAIT have called for additional tax measures to alleviate the financial strain ordinary workers are experiencing during this unprecedented time.  SAICA has specifically requested some relaxation of the requirements for the home office deduction during the lockdown period in order to provide salaried employees with much needed tax relief.  But as things currently stand, the requirements to claim a home office deduction remain in effect and most salaried employees will find little relief under the current rules.

Closing

If you have any questions or comments on this article or if you require more information or assistance with your tax preparation, we would like to hear from you.

Sources:

1. SARS Interpretation Note: 28 (Issue 2) – 15 March 2011
2. Income Tax Act 58 of 1962
3. Moneyweb: Renewed calls for tax relief for home office expenses – Amanda Visser (24 July 2020)

Author:

Liza Moorcroft SAIBA – BA (SA); SAIT – GTP (SA); SARS – TP