Date: 12 July 2021
Author: Coenraad de Beer
It is the tax year 2021. COVID-19 turns the world upside down, we go into lockdown and suddenly we are faced with a significant change in the way we conduct our day to day activities. This compelled us to rethink how we work, but more specifically, where we work.
Many South Africans were forced to work from home to curb the spread of the Coronavirus and even as the lockdown levels were lifted, many employers allowed their employees to continue to work from home. In the midst of our economy taking a nosedive, a surge in unemployment and salary cuts, many taxpayers were looking for ways to reduce their tax liability in the 2021 tax year. With the new work-from-home culture, it is easy to understand why people got excited once they heard of home office expenses. Legend says, every time a taxpayer utters the words “Home Office Expenses” a new SARS auditor is summoned to investigate.
Claiming home office expenses on your tax return is not something new and has been available to commission earners or employees who mainly work from home. It is important to keep in mind that you are very limited in terms of what you can claim against normal remuneration (i.e. a normal salary), compared to persons deriving the most or all of their income in the form of commission and royalties.
Who can claim home office expenses?
The best place to start when working with home office expenses is eligibility. If you are not eligible to claim home office expenses, there is no need to look at the other requirements of this type of claim. Three sections of the Income Tax act apply to home office expenses, namely Section 11(a), Section 23(b) and Section 23(m). Section 11 serves as the positive test, in other words, it deals with the deductions that are allowable against your taxable income, opposed to sections 23(b) and 23(m) which serve as the negative tests, as they deal with the prohibitions imposed on home office expenses.
Under section 11(a) you are allowed to deduct expenses or losses against your taxable income when it is
· actually incurred
· in the production of income (i.e. you need to incur the expense in order to earn the income)
· and not of capital nature (to oversimplify it, it cannot be an asset like a car, computer or furniture, it has to be an expense)
Section 23(m) prohibits the deduction of home office expenses unless you derive income mainly in the form of commission, meaning more than 50% of your income needs to be commission. As I mentioned before, if you just receive a normal salary you are fairly limited in terms of what you can claim against your taxable income, but luckily Section 23(b) has an exception to this rule which opens the door to normal salaried employees to claim home office expenses.
Under section 23(b) you are allowed to claim home office expenses as long as
· you are using a dedicated section of your home for the purpose of the trade,
· which is specifically equipped for the purpose of the trade,
· and is regularly AND exclusively used for purposes of the trade
In layman’s terms, what does this mean? In order to claim home office expenses you will need a room in your house, which is exclusively used for your trade, fitted with tools and equipment specific to your trade, where you perform your duties more than 50% of the time. It is important to note that it has to be a room (not just a dedicated office space) and this room must exclusively be used for business purposes. If you don’t have a separate room to use for business purposes, you won’t be eligible to claim home office expenses.
The act seems to be unfair to this extent, because lower income households might not be able to dedicate a separate room for business purposes, or take open plan bachelor flats for example, they don’t even have separate rooms. I guess SARS is not too keen on widening the scope of the act, but there are a couple of practical and valid scenarios that are excluded by the act in its current form. Whether SARS will ammend the act remains to be seen, but in terms of the 2021 tax season, it will be pretty strict and many taxpayers will not be eligible to claim.
What expenses can be claimed and how do you calculate it?
In general the following expenses can be claimed
· Rent paid
· Interest on your bond
· Repairs and maintenance on buildings
· Insurance (on the building / structure alone, not the contents)
· Rates, taxes and levies
· Cleaning expenses
· Wear and tear on office equipment
Wear and tear allowances can be claimed on equipment you own, but equipment supplied by your employer will obviously not be eligible for this claim. This is also the only expense that is not apportioned based on the floor area occupied for business purposes, the other expenses must all be apportioned.
One thing you might miss from the list above is internet and data costs. SARS seems to be of the opinion that data costs should be a company expense and should be recovered from your employer. To a certain extent this makes sense, because it is very unlikely for an employer to shift company costs to their employees now that they are working from home. It would be very unreasonable from employers to expect employees to recover their costs from SARS in the form of tax savings, which is anyway only a portion of the expense and can only be done a year after the employee incurred the expense.
In order to calculate the apportionment ratio or percentage, you first need to measure the floor area of the room you reserved for business purposes. The floor area needs to be accurately measured and not estimated. Secondly you will measure the floor area of all the physical structures on the premises including any external buildings, so your measurements will not be limited to the main dwelling alone. Take note that you will only use the floor areas of the buildings on the premises and not the total erf size.
For example, if the floor space of the home office is 10m2 and the floor space of the house is 100m2, you will be allowed to deduct 10% (10 / 100) of the expenses mentioned above.
Let’s say you had the following expenses during the tax year:
Repairs and maintenance (repainted the whole house)
Rates and taxes
Electricity and water
Take the total expenses of R58,600 and multiply it by the percentage we calculated above, therefore
R58,600 x 10% = R5,860
This means you will be able to claim R5,860 against your taxable income. The actual amount you will save in tax will depend on your marginal rate (tax bracket). If you are in the 36% tax bracket, in a scenario like this, you can save up to R2,109.60 in tax.
Negative impact on Capital Gains Tax (CGT)
One of the drawbacks of claiming home office expenses is the negative impact it has on capital gains tax. When you sell your primary residence, the first R2 million of the capital gains are excluded for income tax purposes. However, if you claim home office expenses, a portion of your home is “tainted” for capital gains purposes. The primary residence exclusion can only be applied to the untainted portion of your home and the tainted portion will be fully taxable at the applicable CGT inclusion rate (at the moment 40% for individuals).
For example, you sell your house for R4,000,000 and bought it for R2,000,000, this means you will generate a capital gain of R2,000,000. If you never claimed any home office expenses, the full R2 million of capital gains will be excluded. If we take the previous example and assume you claimed 10% of your home office expenses for one year and owned the house for 3 years, you will calculate the “tainted” portion of the capital gains as follows:
R2,000,000 x 10% x 1/3 = R66,667
If you had no other capital gains in this specific tax year, you can reduce this amount with the annual capital gains exclusion of R40,000, thus R66,667 – R40,000 = R26,667. Forty percent of the R26,667 will be included in your taxable income for that year: R26,667 x 40% = R10,667. If we assume your marginal rate is 36% as in our previous example, you will pay an additional amount of R3,840 in capital gains tax when you sell your primary residence.
This specific example illustrates how home office expenses can lead to a scenario where you end up paying more tax than saving tax, but this all depends on so many factors that it is impossible to predict if this negative clawback effect will apply to you. The longer you own the premises without claiming home office expenses, the smaller this “tainted” portion will be. On the other hand, if you claim for several years, it is likely that the cumulative value of your claims will be more than the tax you will pay on this tainted portion of your primary residence.
It is important to note, this section of the act is only applicable if you own the premises. If you pay rent, you will have no CGT implications to take into account.
How will I substantiate my claim for home office expenses?
As with any claim submitted to SARS, the burden of proof rests with the taxpayer. If SARS is questioning your claim they will request certain supporting documents to clear up any doubts they might have. SARS seems to be very strict about home office expenses and the red tape surrounding home office expense audits is quite extensive to say the least. Here are some examples of what SARS might request during an audit (this should not be seen as an exhaustive list):
· Floor plans of your home, detailing the total floor area as well as the floor area of the room reserved for business purposes.
· Photos of the room showcasing the equipment and tools you are using to work from home.
· Invoices and proof of payment for the expenses you are claiming, this includes your municipal accounts, bond statements, your rental agreement, etc.
· Letter from your employer confirming that you were allowed to work from home.
· The calculations of the expenses as well as the apportionment ratio.
In extreme cases SARS might even do a physical site inspection, but I highly doubt they will go through all that trouble to accommodate the taxpayer, if you sent them all the documents mentioned above and they are still not convinced, they will most likely just deny the claim. It is therefore imperative to make sure you can back all your claims without a doubt, otherwise it will just be an uphill struggle to get your claims approved.
Unfortunately, with SARS there is never a guarantee your claim will be successful on the first attempt. SARS can request additional information if they are not satisfied with your supporting documents. In order to improve your chances of making a successful claim, ask yourself the following questions:
· Did I really sacrifice a separate room in my house for business purposes? Remember, commission earners and independent contractors had to convert a portion of their home as their base of operations, because they are working for themselves most of the time. If you went to the same lengths to set up your home office, by utilising a separate room, exclusively for business purposes, you are already halfway there.
· Did I really incur additional expenses by working from home? Was there an increase in my utility bill or am I paying additional insurance on the office furniture I acquired for my home office (a desk, chair, multiplugs, extension cord, desk lamp, etc)? If this is indeed the case, you should have a solid base to back your claims.
· Did I keep proper record of all my expenses regarding my home? Did I retain invoices of my municipal account, repairs and maintenance and payslips of my domestic worker? Do I have bond statements for the entire tax year and are my floor plans readily available? Is my rental agreement in written form and is my landlord willing to put it in writing or update an old rental agreement? Having all your documents in order is the key to a successful claim. Prepare your supporting documents beforehand and do not wait until you are audited, the sooner you submit your supporting documents, the sooner the audit can be finalised.
If you merely moved your laptop from your employer’s office to your home and worked from the kitchen table, or if you simply moved a desk to your bedroom from where you connected your employer’s laptop and printer, you will not be eligible to claim. If you only required a corner and a desk to work from home, with your employer supplying all your tools, data or even airtime, you most likely saved more money by working from home, with less being spent on fuel and travelling expenses. In cases like these it will be hard to argue that you actually incurred costs by working from home and this is most likely the reason why SARS is not keen on changing the main requirement of an exclusive room for business purposes.
The verdict: Is it worth it?
Claiming home office expenses is unfortunately not clear cut and simple. There are a lot of variables to consider and boils down to the fact that each taxpayer’s case should be based on its own merits. It involves various calculations and taking into account the possible negative impact of capital gains tax in the future. If you are unsure, you might want to consult a professional to assist you with the calculations, but this also increases the costs of preparing and submitting your income tax return. Keep in mind, a home office expense claim will put you in SARS’s crosshairs, so there is a high possibility of being extensively audited, putting a hefty administrative burden on taxpayers to substantiate their claims. The benefits of the claim should therefore outweigh the costs, otherwise it is just not worth it.
If you are not using a significant portion of your home for business purposes and if the qualifying expenses are insignificant, it might not be worth your while going through all this effort for a tax saving of a couple hundred rand. On the other hand, if you are still paying a lot of bond interest on your home, you might have enough expenses for a proper tax saving.
Taxpayers who rent do not have to worry about the negative capital gains tax implications of the act, but if you are simply renting a small flat, don’t expect a huge refund. That being said, a small flat might not even have a separate, dedicated room available for a home office, automatically disqualifying you from any home office expense claim.
This portion of the act was developed with commission earners and independent contractors in mind, so the strict rules associated with the application of this act is not really suitable for normal salaried taxpayers. Unless SARS amend the law and broaden its scope, a lot of people will not be able utilise home office expenses.
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