The SARS has now provided some clarity through the issue of a draft Interpretation Note on the deductibility of home office expenses incurred by persons in employment or persons holding an office.
This follows the proposals submitted by various stakeholders to National Treasury, requesting that relief be provided to salaried taxpayers who are required to work from home and who incur business-related expenditure because of the Covid-19 pandemic.
Claiming home-office expenses as a tax deduction has been controversial for many years and has again become the topic of discussion ahead of the 2021 filing season.
SARS has again affirmed that not only commission or business income earners, but salaried employees can also claim home office expenses. The deductibility of expenses pertaining to fibre optic cables is further clarified by SARS to be not-deductible.
All said, the provisions of Section 23(b) still apply to all salaried employees and provides that only very specific expenses may be claimed. It therefore remains imperative for all salaried employees to carefully consider what they can and cannot claim, this will further ensure a successful tax claim when filing their 2021 tax return.
Various stringent requirements must be met before a claim in respect of home office can be considered, they are:
- The part of the home, i.e. the workspace, for which a claim is submitted must be occupied for purposes of a trade (which includes employment).
- The workspace occupied must be specifically equipped for purposes of the trade, e.g. a desk, computer, and so forth.
- The employee must regularly and exclusively use the workspace for business purposes, it cannot be used for private purposes. If an employee does not have a separate study or workspace available in his or her home, home office expenditure will not be allowed as a deduction.
- Employees who do not earn commission but who spend most of their time on the road visiting clients and who perform their duties mainly at their clients’ premises do not qualify for this deduction.
- The employee’s duties must be performed mainly (which means more than 50%) in his or her workspace.
- The employer must have allowed the employee to work from home, a letter from the employer stating the following will lend support to this fact:
- the employee is permitted under the employment agreement to render employment services away from the employer’s premises; and
- that the employee was not present at the employer’s premises for a particular number of days.
- Remember! - It is not within an employer’s personal knowledge to confirm whether the employee actually performed his or her duties in the workspace.
Salaried employees could claim the following limited pro-rated expenses:
- rent of the premises, interest on a bond, cost of repairs to the premises, rates and taxes, cleaning, and other expenses in connection with the premises.
- SARS accepts that the correct method to calculate the proportion of expenditure attributable to a part of a premises occupied for purposes of trade, is apportionment based on floor area of the premises.
- When using this methodology, it is imperative that the entire area of all the buildings on the property is used to calculate the portion of expenditure attributable to the workspace and not only the area of the main dwelling.
Unfortunately, the following expenses continue to be prohibited as a tax deduction of salaried taxpayers:
- phones (including the monthly charges), internet and fibre connection, stationery, office equipment and communication equipment
- However, equipment may qualify for a wear-and-tear allowance under section 11(e)
When compared to commission and business income earners, who are currently not subject to the same restrictions in claiming expenses, one can only hope that SARS will allow similar relief to salaried taxpayers who were and continue to be forced to work from home and who incur business-related expenditure as a result.
All taxpayers should carefully consider the potential capital gains tax (CGT) implications when their primary residence is used partially for purposes of trade:
If your primary residence has been used partially for purposes of carrying on a trade, such as in the case of making use of a home office, and you subsequently dispose of the dwelling, the following should be considered -
- the primary residence exclusion of R2 million must be apportioned for the non-residential use; and
- the R2 million-proceeds rule for disregarding any capital gain, does not apply to the part of the premises used for purposes of trade.
- The apportionment will be based on the proportion of the floor area used for business and private use (similar methodology when claiming your pro-rate home office expenses), and must be applied to the total capital gain to arrive at a private portion of the capital gain, and a business portion of the capital gain.
Tax legislation currently provides for capital gains tax to be payable on the business portion of the capital gain irrespective of the whether the taxpayer claimed or was entitled to claim a tax deduction in respect of home-office expenses.
This is desperately unfair especially where salaried taxpayers have no choice but to work from home due to the COVID-19 pandemic. Not only are salaried taxpayers limited in the expenditure that qualifies for home office use but will also suffer capital gains tax on the portion use as home office!
In the Budget Speech that was delivered on 24 February 2021, National Treasury announced that the large-scale migration to remote working over the course of the pandemic had prompted it to review current travel and home office allowances. The promise of a more efficient and fair application across all categories of taxpayers, and its simplicity of use will be investigated.
Legislation should entail a hybrid model where the law operates not to prejudice any taxpayer who was forced to change his or her workplace overnight - brought on by the Covid-19 pandemic that continues to rapidly transform the landscape of conducting business we once viewed as “normal”.