The deduction of home office expenses is a grey area in tax. This is partly because it’s regulated by several income tax act provisions that are interpreted differently by the parties involved. SARS is usually stricter in its interpretation. And if SARS queries the expenses, it’s your responsibility to convince SARS that the expenses are deductible.

What’s the deal?

Taxpayers who are employed and earn a salary are limited in the expenses they can deduct from their taxable income. In fact, the income tax act specifically prohibits (with specific exceptions), the deduction of expenses that you incur as a result of your employment. This means that you can’t deduct the cost of your transport to and from work, and you can’t deduct the cost of your residence. However, there is an exception when part of your residence is occupied for the purposes of trade.

Note: The rules are different for taxpayers who earn more than 50% of their income from commission. In this post, we’re only discussing ordinary salaried employees.

To qualify for home office expenditure

For employment to constitute a “trade” and to qualify to deduct expenses incurred in a home office, the taxpayer must be able to prove that the home office:

• Is specifically equipped for this purpose. The office must be equipped with tools and equipment (desks, chairs, computers, printers, trade-specific equipment etc.). A lounge, living room or empty, unoccupied room doesn’t qualify as a home office.
• Is used regularly and exclusively for this purpose. The odd email over a weekend or using the space as a children’s play area, doesn’t count in this regard.
• Is where more than 50% of the taxpayer’s duties are performed. The income tax act doesn’t prescribe whether this refers to time or volume of work, but it’s generally accepted as the total working time.

Guidelines: Employment that requires a home office

Although not specifically prescribed, SARS provides the following helpful guidelines:

• There must be a direct relationship between expenses incurred and the production of income.
• It must be a requirement of the employment contract that the taxpayer maintains a home office at their private residence.
• The home office may only be used for business purposes.

To support your claim for a home office deduction, you need to prepare (and keep for five years), a schedule detailing the following:

• The nature of the occupation and why a home office is necessary.
• A copy of the service contract, regulations or personnel code that specifies the need for a home office.
• The extent to which your home office is indispensable to the proper carrying out of your job.
• If your employer provides a workplace office for your use. If there is an office available, you should include full details of any restrictions on the use of this office. You also need to have a letter confirming these details from your employer.
• If the nature of your work means that you’re expected to work at home after hours. You need to provide full details of how often you use this home office, along with a statement from your employer that confirms these details.
• If you’re required to use your home office to interview or supply information to clients or employees after hours.

What types of expenses qualify?

Although the income tax act doesn’t provide a laundry list of the deductible or prohibited expenses, the following expenses generally qualify:

• rent
• interest on your bond
• cost of repairs to the premises
• phones
• stationery
• rates
• cleaning
• office equipment
• wear-and-tear

How is the deduction calculated?

Since only a portion of the premises is used for work, the following apportionment is made:

• A / B x total costs

A = the area in m² of the area equipped and used regularly and exclusively for trade; and
B = the total area in m² of the residence, including any outbuildings and the area used for trade.

The amounts that you’re claiming as home office expenses must be entered next to code 4028 on your ITR12 return.

A cautionary note: Capital Gains

If your home has been used for purposes of a trade (such as having a home office), it may influence the primary residence exclusion for Capital Gains Tax when you sell your home.

Being tax efficient is an important part of great financial management. In this blog, a group of South African tax experts share their tips and explanations on tax issues. Learn everything you need to know about tax, from deductions you never knew about to retirement savings and capital gains. The first Tuesday of every month is Tax Tuesday.