Many taxpayers believe that home office-related expenses are deductible if they work from a home office but that in practice SARS often disallows the deduction of such expenses. In reality, there are many cases in which no deductions for home office expenses are available and, in general, it is the legislation itself that is very restrictive rather than SARS that is unreasonable in disallowing the deductions claimed. There have been calls from numerous quarters for the restrictive provisions of Income Tax Act relating to home office expenses to be relaxed. The Minister of Finance announced in his 2022 National Budget that a discussion document will be published in 2022 on a personal income tax regime for remote work and we hope that this will herald relief in this area.
Section 23(b) of the Income Tax Act disallows rent, repairs or expenses in connection with domestic premises or a part of such premises, except if such part is occupied for purposes of trade (note ‘trade’ includes employment). This provision also deems such premises or part of a premises not to be occupied for purposes of trade unless it is specifically equipped for purposes of the taxpayer’s trade, and it is regularly and exclusively used for such purposes. Unless these requirements are met, no deductions relating to the premises will be allowed. The requirement that the office be exclusively used for purposes of the taxpayer’s trade often proves problematic in practice.
This provision also contains a requirement in relation to where an employee’s or director’s duties must be performed. This requirement is more restrictive in relation to non-commission earners than commission earners. In the case of an employee or director whose remuneration is derived mainly (that is, more than 50%) from commission, no home office deductions at all will be granted unless the earner’s duties are mainly (that is, more than 50%) performed elsewhere than in an office provided by the employer (for example, at a combination of clients’ premises and the home office). If remuneration is not derived mainly from commission, no home office deductions at all will be granted unless the earner’s duties are mainly performed in the home office.
So, in the case of a non-commission earning salaried employee or director who uses an office at home for work purposes, section 23(b) disallows home office deductions unless:
- The office is used regularly and exclusively for purposes of the employee’s work;
- The office is specifically equipped for these purposes; and
- The employee’s duties are mainly performed in such part.
In the case of an employee or director whose remuneration is mainly derived from commission, section 23(b) disallows home office deductions unless:
- The office is used regularly and exclusively for purposes of the employee’s work;
- The office is specifically equipped for these purposes; and
- The employee’s duties are mainly performed elsewhere than in an office provided by the employer.
In the case of employees and directors whose remuneration is not mainly derived from commission, section 23(m) contains further restrictions in that it only permits a claim for deductions contemplated in section 11 relating to domestic premises under sections 11(a) (the so-called general deduction formula) or section 11(d) (repairs). It also only permits a claim to the extent that such deductions are not disallowed under section 23(b), which has been discussed above.
Assuming the taxpayer is not disqualified by the above requirements, typical deductions that may be claimed are rental, electricity, water and sewerage, rates, monthly security costs, cleaning, body corporate levies adjusted to remove the portion relating to the common property (all apportioned on a floor area basis to the home office) and repairs specifically to the home office. The taxpayer may also claim wear and tear in relation to the costs of capital items that do not form part of the premises itself that are used for trade, for example furniture in the home office, computers and printers, provided that the taxpayer owns these items. As is the case with all deductions, the taxpayer bears the onus of proving that the amounts claimed are deductible. SARS recently released an updated Issue 3 of their Interpretation Note No. 28 on “Deductions of Home Office Expenses incurred by Persons in Employment or Persons holding an Office” (‘the Interpretation Note’). In it, SARS states that it is advisable to have pictures of the home office area, plans of the house showing the location of the home office and invoices and / or agreements relating to the expenses claimed available in the event of a SARS query. SARS also suggests that a letter be obtained from the employer, on the employer’s letterhead, confirming that the employee was permitted to work from home, including the periods that the employee was permitted to work from home and, if available, those periods that the employee did not report to the office. Since a letter from the employer confirming permission for the employee to work from home does not prove that the employee actually worked from the home office, SARS also suggests that the employee maintain a schedule of dates detailing when the employee worked from home during the year of assessment as well as a calculation proving that the employee worked mainly from the home office during the year of assessment.
In the case of employees or directors whose remuneration is not mainly derived from commission, SARS has recently announced an about-turn in relation to the claiming of bond interest in relation to home offices.
The Interpretation Note states that in cases where home office expenses are deducted against remuneration income and the individual does not derive remuneration mainly from commission, interest on bond apportioned to the home office will not be deductible if the bond comprises an instrument that falls into section 24J (which is usually the case). This new interpretation is effective for years of assessment commencing on or after 1 March 2022, in other words from the 2023 year of assessment and thereafter, and the Interpretation Note states that this interpretation will apply from this date forwards but not retrospectively to years of assessment that commenced prior to 1 March 2022.
The reason given by SARS for the non-deductibility is technical in that it relates to the interaction between sections 23(m) and 23(b). There has been no amendment to the Act that is effective from 1 March 2022 in this regard, and it seems that SARS has changed its interpretation of the pre-existing law. There is an argument that bond interest that is contemplated in section 24J is not an expenditure, loss or allowance contemplated in section 11(x) and therefore that such bond interest should not be hit by the prohibition in section 23(m). It is thus not entirely clear whether this revised interpretation by SARS is correct.
This revised interpretation leads to an anomalous difference in treatment between rental, which is potentially deductible as it would not be hit by section 23(m) and bond interest, which is not deductible as it would be hit by the section.
If the individual derives his or her remuneration mainly from commission, whether or not the above revised SARS interpretation is correct, the above prohibition on the deductibility of section 24J interest does not apply.
A contentious interpretation in the Interpretation Note is that monthly fibre subscription fees are not allowable on the basis that they are not expenses in connection with the premises but are expenses in connection with telecommunication services. Because the monthly fibre subscription fees relate to cabling that physically leads into the premises, this appears to be an overly restrictive interpretation by SARS. It may be questioned why similar reasoning should not apply to expenses such as monthly security or electricity costs which also relate to services supplied to the premises, which the Interpretation Note states may potentially be deducted. The Interpretation Note also states that household content insurance is not allowable as it does not relate to the premises itself.
It is important to note that if part of a primary residence is or was used as a home office, upon disposal of the primary residence, the home office portion of the primary residence will not qualify for the R2 million primary residence exclusion from capital gains tax. The result is that a capital gain or loss that arises in respect of the disposal of the primary residence will have to be apportioned between the part of the primary residence that was used as a primary residence (in other words, not used mainly for the carrying on of a trade) and the part that was used as a home office. The home office portion will be ‘tainted’ in that it will be fully exposed to capital gains tax, while the R2 million primary residence exclusion will be available for use against a capital gain that arises on the portion that was used as a primary residence. One may have to take account of a floor area and / or time- based apportionment method to arrive at the correct apportionment of the capital gain. For example, one would use a combination of floor area and time-based apportionment if the residence was used exclusively as a primary residence for a period and then a portion was used as a home office for a period.
In conclusion, it is unfortunate that the provisions governing deductions for home offices are so restrictive, especially given that during the COVID pandemic many employees were forced to work from home and incur expenses in this regard. It is evident from the above discussion that the provisions relating to deductions for home office expenses are complex and I recommend that taxpayers wishing to claim these amounts seek professional advice before doing so.
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