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moreThe threat of the Covid-19 pandemic resulted in a national lockdown in South Africa that commenced on 27 March 2020. This has brought about a significant change whereby many employees are now being required to work from home.
The question now arises as to whether these employees will be entitled to claim any home office expenses incurred during the period that they are required to work from home.
In this article we will focus on the requirements that must be met by a normal salary earner in order to potentially claim a tax deduction for working from home.
There are specific criteria that needs to be met before a normal salary earner can qualify for a home office deduction for tax purposes. Due to the controversy over the deductibility of home office expenses, SARS has issued some guidance over the years that should be considered. All of the following criteria must be met in order to claim a home office deduction:
1. The home office needs to be specifically equipped for purposes of the employee’s trade
The employee’s home office needs to be specifically equipped & designated for their trade. This means that working in the dining room would exclude you from claiming the deduction as the dining room table is not specially equipped & designated for your trade. The space has to be fitted with tools & equipment required for the employee to conduct their trade.
2. The home office is regularly and exclusively used for trade purposes
An employee has to use their home office on a regular basis and not just for example two days a week. If you were able to work from home during lockdown, you would have used your home office on a regular basis, namely 5 days a week.
The home office should also be used exclusively for the purposes of the employee’s trade. This means that the home office is only available for the employee’s trade purposes. It cannot be used as a spare bedroom or the kids’ playroom. It has to be used exclusively for trade purposes.
3. The employee’s duties are mainly performed from the home office
An employee has to perform their duties mainly from their home office. This means that more than 50% of their duties have to be performed from their home office.
Therefore, if an employee was working from home since 27 March 2020 up to the end of September 2020, the employee may qualify for certain home office expense deductions in the February 2021 year of assessment, if all criteria have been met.
Once an employee meets all of the requirements, they would be able to claim certain expenses in their annual income tax return. This could include for example:
- Rental expense
- Interest on bond
- Cost of repairs to the premises
- Rates & taxes
- Cleaning
- Wear & tear on office equipment.
For expenses that relate to the entire house, they would need to be apportioned in the ratio of the home office space as a percentage of the entire house.
It should be noted that, in comparison, commission earners working from their home office may claim certain additional expenses incurred in the production of the commission income, for example:
- Cell phone & data cost
- Travel expenses
- Stationary cost
A salaried employee working from home may have incurred certain expenses i.e. data costs or purchased home office equipment. It is very important to understand the different tax implications with regards to the funding of the said expenses.
Should the employer provide the employee with an allowance per month to cover expenses, for example monthly data cost, this allowance will be taxed as part of their remuneration. The data cost would also not be allowed as a deduction (as it is specifically prohibited for a salaried employee to deduct such expenses compared to a commission earner).
Should the employer rather reimburse such cost, it would not be taxable in the employee’s hands. However, deciding how much to reimburse may be difficult to substantiate as data usage could differ between employees and the nature of their respective duties. We advise employers to include a reimbursement policy in their company policy manuals to clarify the treatment and maximum reimbursement amounts.
In addition to the above, if the employer has reimbursed any expenses for the purchase of any home office equipment, that would not be taxable in the employee’s hands. However, it is important to note that such equipment is the property of the employer, otherwise it would be seen as a taxable allowance.
Once the qualifying home office expenses have been calculated, the employee would need to declare this value in their annual tax return, under the “Deduction” section.
The downside to claiming any home office expenditure is the potential impact it may have on the capital gain/(loss) that may be realised if you dispose of your primary residence in future. The home office deduction has an impact on the disposal as a portion of your private residence was utilised for trade purposes. In this instance, an employee would be required to exclude a portion of the capital gain/(loss) from the disposal of their primary residence calculation (that qualifies for a R2 million exemption) and declare this as a separate disposal that may be exposed to Capital Gains Tax.
It is always important to note that a taxpayer should be able to prove to the South African Revenue Service that they have incurred any expenses being claimed for tax purposes, therefore we advise that you maintain all supporting documentation related to qualifying home office expenses incurred during lockdown, including the workings determining the percentage of expenses claimed.
Home office deductions are definitely something to consider for qualifying employees, provided that you meet all the criteria and have given careful thought to any potential future impact it may have. It is a complex and controversial area of the Income Tax Act and SARS has always investigated this deduction very thoroughly. We advise that you contact your tax practitioner to guide you through this process.
Engela Crocker
Regional Divisional Director: Tax, Johannesburg