In today's article, I will be giving you a better sense of the requirements for claiming expenses relating to our home office and the implications of making such a claim. I am going to give you an overview on the law and its application around home office expenses.
This article serves to provide additional clarity for individual taxpayers who may be considering submitting claims for home office expenses in their income tax returns that can now be filed for the 2021 tax year.
Understandably, due to Covid-19, a number of individuals spent more time than usual working from home.
In considering whether to claim for any related expenses, it is important to note the following:
There have been no changes to the legislation in relation to a “home office”. The legal requirements remain the same as before the Covid-19 pandemic. In brief this means:
An office, appropriately equipped, must have been set up at the place of primary residence;
The office must have been used regularly and exclusively for work purposes;
The office must have been used for more than 50% of the employee’s duties or, if the employee earns more than 50% of their remuneration from commission or other variable payments based on work performance, more than 50% of the employee’s duties must have been performed away from the employer’s office;
Any home office expenses must be linked to employment use and must be verifiable; and
Home office expenses must be claimed against source code 4028 in the income tax return
Where will I claim home office expenses on my Income Tax Return (ITR12)?
Should you qualify for a deduction in respect of a home office; enter the amount calculated next to the source code 4028 (Home Office Expenses) in the “Other Deduction” container on your Income Tax Return.
I want to complete the home office expenses but it does not reflect on the form wizard questionnaire?
When completing the form wizard on the Income Tax return (ITR12), answer the question “Did you incur any expenditure that you wish to claim as a deduction that was not addressed by the previous questions?” (Select ‘Y’ or ‘N’). If yes, the section for ‘Other Deductions’ will be added to the return.
How do I calculate home office expenses?
The tax deduction is calculated for the area of the home utilised for trade e.g. employment purposes. Home office expenses relating to the premises are calculated on a pro-rated basis (square meters of area of home office versus total square meters of your home).
What is the method of calculating home office expenses?
Should you qualify for a deduction in respect of home office expenses, the amount must be calculated on the following basis: A / B x total costs, where:
A = the area in m² of the area specifically equipped and used regularly and exclusively for trade e.g., employment
B = the total area in m² of the residence (including any outbuildings and the area used for trade in the residence)
Total costs = the costs incurred in the acquisition and upkeep of the property (excluding expenses of a capital nature). *
*Note that only expenses relating to the premises must be apportioned based on floor area (such as for example rent, interest on bond, rates and taxes, cleaning, etc.) Expenses that do not relate to the premises (such as wear and tear on equipment and furniture) do not need to be apportioned based on floor area.
What are the Capital Gains Tax implications if I sell my house used partially for trade?
The first R2 million of a capital gain or capital loss on the disposal of a primary residence must be disregarded for Capital Gains Tax (CGT) purposes. If the proceeds in respect of the disposal of the primary residence are R2 million or less, any capital gain thereon must also be disregarded. However, if a primary residence has been used by a taxpayer partially for purposes of carrying on a trade, such as in the case of a taxpayer that makes use of a home office, then 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, 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.
Where the home office is in taxpayer owned property, taxpayers should note that formally defining part of a primary residence as a home office will most likely have an adverse impact on a future capital gains determination. The home office area will, on a pro-rated basis, be excluded from the primary residence exclusion of R2 million on disposal of the residence.
Careful consideration should, therefore, be given before a claim for home office expenses is made. Taxpayers may also find that working from home led to savings on expenses they would otherwise have incurred, like transport, wear and tear on vehicles and so forth. Taken together with the loss of part of the of the capital gains exclusion, these savings may outweigh the benefit of a claim for home office expenses.
Whilst all claims for home office expenses may be subject to further verification or audit by SARS, it is important to note that there is a high likelihood that a taxpayer who claims home office expenses for the first time will be selected for verification or audit.
Requirement For a Home Office
Applicable
Section 11(a)
Deduction
Expanding or losses
Actually incurred
In the production of income
Not of capital nature
Section 23(b)
Deduction
Part of domestic premises must be used for purpose of trade
Part which is used, must be regularly and exclusively used for trade
Must specifically equipped for thee for the purpose of trade
For employees or office holders’ duties must be mainly (more than 50%) performed.
Section 23(m)
Prohibits deductions for employees unless their remuneration normally consists more than 50%of commission
Does not apply to deduction contemplated in sections
Section 23(m) also create an exceptional for home
expense, provided they meet the requirement of section 23(b)
The part of the home i.e., the office space, for which a claim is submitted must be occupied for purposes of a trade (which includes employment
The office occupied must be specifically equipped for purposes of the trade eg a home study desk computer, and so forth.
The employee must regularly and exclusively use the office for a business purposes ie it cannot be use for private purpose if an employee does not have a separate study or office available in their home, home office expenditure will not be allowed as a deduction
Employees who are not commission earners, but who spend the majority of their time on the road visiting client’s information their duties mainly at their clients’ premises do not qualify for a deduction/claim of home office
The employer must allow the employee to work from home, confirmation there will be requirement upon and (not applicable to commissions earners)
Home Office Deduction
Expense of a capital nature are not allowed ie repayment on bond capital limited to interest to interest on the bond, the expense must be actually incurred and in the tax year in question eg in 2021 Tax year is from (2020-03-01 to 2021-02-28) and all expense incurred must relate to the home office
Below Are Example Of Expense That Can be Claimed
Rent of the premises
Interest on a bond
Repairs
Rates and taxes
Cleaning
Other expense in connection within the premises
Phone (only commission earners can claim for stationery)
Wear-and tear on office equipment
Calculate the area of your home office as a percentage of the total area of your home
Apply this percentage of the total expenditure in respect of the home, eg, rent bond interest, water and electricity, rates and add taxes, repairs
Add any other allowable expenditure eg wear-and -tear etc
Ensure the calculate is available expenditure for SARS Inspection, along with all supporting document (invoices, bond) statement, municipal bill, rental agreement etc)
Home Office And Capital Gains Tax
The primary residence for an individual is the first R2m of any capital gain or loss arising on sale or the first R2m of proceeds from the disposal
When a part of your home is used as a home office and deduction is claimed for this part of your home is considered tainted for capital gains tax
Upon the sale home the overall capital gain/loss will need to be apportioned between its tainted (trade) and untainted (private) elements
The primary residence exclusion can only be off against the untainted (private)portion of the capital gain/loss and the tainted (trade) portion of the capital gain must be fully brought to account
The tax impact that home office has on the calculate of capital gains tax upon sale of a property in the future could be considerable
The following example illustrates how the primary residence exclusion works and how a home office could affect the tax due on disposal.
Record Keeping
Documentary proof is essential to enable you to claim you to claim actual expenses incurred
Expenses may be overlooked, unless you record them at the time the are incurred
To enable you to complete your tax returns accurately
All documents must be kept for a period of 5 years
Conclusion
I understand SARS Home Office Tax Requirements can be a lot for you to prepare and you may lack knowledge of what is required Hence, I highly recommend you hire a reputable accounting firm to help you and significantly save the stress, time, and money you could otherwise incur over time.
