Tax Tuesday: Tax deductions on your home office

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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 – with SARS usually stricter in its interpretation. It’s also the taxpayer’s responsibility to prove to or convince SARS that the expenses are deductible, if required.

What’s the deal?

Taxpayers who are employed and earn a salary are limited in the deductions allowed when calculating their taxable income. The income tax act specifically prohibits—apart from specific exceptions—the deduction of expenses that relate to employment. This means the deduction of any residence (i.e. a home) is prohibited, except where it’s partly occupied for purposes of trade.

The rules are different for taxpayers who earn more than 50% commission income. In this blog, we’re only going to focus on ordinary salaried employees.

The requirements 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 should 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 don’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.

What types of expenses qualify as home office expenditure?

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 the bond
  • cost of repairs to the premises
  • phones
  • stationery
  • rates and taxes
  • 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 should be 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.

Guidelines: negotiating employment agreements requiring 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.
  • The taxpayer must, in terms of their employer’s service contract requirements, maintain a home office at his/her private residence.
  • The home office may only be used for business purposes.
  • A schedule detailing the following must be prepared and kept for five years should SARS request it:
    • The nature of the occupation and why is it necessary to maintain a home office.
    • A copy of the service contract, service regulations or personnel code.
    • If the employer offers a workplace office which is at the taxpayer’s disposal. Full details regarding any restrictions concerning the use of this office and a confirmation letter from the employer should be supplied.
    • If the work is of such a nature that the taxpayer is expected to work at home after hours. Full details on the frequency of use and a statement confirming the use thereof are required from the employer.
    • If the taxpayer is required to use the home office to interview or supply information to clients or employees after hours.
    • If the home office is specifically equipped for purposes of the trade.
    • If the home office is used regularly and exclusively for the taxpayer’s work.
    • The extent of the home office’s indispensable contribution to the proper carrying out of the taxpayer’s tasks.

The amounts claimed as home office expenses must be declared next to the code 4028 on the taxpayer’s ITR12 return.

A cautionary note

If your home has been used for purposes of a trade (such as having a home office), it may influence the primary residence exclusion available to taxpayers on the sale of the residence – more on this in a future blog.

Tax Tuesday blog

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.

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