The Deduction of Home Office Expenditure




Nowadays, work culture has evolved massively. “Flexible employment” has become the new buzzword. This is especially relevant at the moment, where many employees are working from home due to the global Corona virus outbreak.

It is worth understanding the tax rules around home office expenses as SARS may allow these employees to deduct their home office costs within the “Other Deductions” section of the ITR12. It is important to realise though, that this deduction is only allowed under certain specific conditions.

With that said, it’s important to understand that this situation is different for sole proprietors or freelancers who work from home – these taxpayers can automatically deduct all their home office expenses. Luckily, for them, they needn’t work through the same stringent set of conditions, to see if they qualify for a deduction. They can just simply reflect the relevant portion of home office expenses within the "Local Business, Trade and Professional Income" section of their ITR12.

This is what’s required in order to deduct home office expenditure:

• The employer must allow the taxpayer to work from home. Please see letter from employer which is required. 

• The taxpayer must spend more than half of their total working hours working from their home office.

• The taxpayer must have an area of their home, which is used exclusively for this purpose. For example, taxpayers who meet clients at their home in their dining room would not qualify. Similarly, a room which is used as an office in the morning and doubles up as a  kid's playroom in the afternoon, also would NOT qualify. A separate space, which is used specifically for the taxpayer’s work, needs to be maintained in order to qualify for the deduction.  SARS are being very strict with this requirement and are asking for evidence in the form of photographs and floor plans.

• The office must be specifically equipped for the taxpayer’s trade i.e. it must be specially fitted with the relevant instruments, tools and equipment required for the taxpayer to perform their work.

NB: If you do not meet ALL of the the requirements above, do NOT claim a home office deduction. SARS is working hard to detect false home office claims and could even do a visit to your house to check out your home office. Be warned!

What expenses can be deducted?

Firstly, one needs to look at the taxpayer’s remuneration structure to see whether he/she:

• is a “commission earner” i.e. takes more than 50% of their total remuneration from commission or some other variable form which is based on their work performance or,

• is a normal salaried employee with variable payments/commission making up less than 50% of their total remuneration.

The first group (i.e. “commission earners”) can deduct rent, interest on bond, repairs to the premises, rates and taxes, cleaning, wear and tear and all other expenses relating to their house as well as other commission related business expenses (e.g. internet, telephone, stationery, repairs to printer etc.).

The second group (i.e. salaried employees with variable payments/commission making up less than 50% of their total remuneration) can deduct rent, interest on bond, repairs to the premises, rates and taxes, cleaning, wear and tear and all other expenses relating to their house only.

How to calculate the home office deduction

One needs to work out the total square meterage of the home office in relation to the total square meterage of the house, and then convert this to a percentage. One then applies this percentage to the home office expenditure in order to calculate the portion, which is deductible.

Let’s look at an example:

Leigh-Ann is a graphic designer who works for Company A. Her remuneration consists of a salary only. Her Company promotes a flexible work culture and therefore allows Leigh-Ann to work from home three days per week. Leigh-Ann has a separate office at home, fitted out with a computer and printer, which she uses exclusively for her graphic design job. The computer and printer were purchased two years ago for R 12 000 and R 8 000 respectively. Her office is 20 square meters, and the floor space of her entire home (including the office) is 200 square meters.
Assume that SARS allows for a 3-year depreciation period for the computer and printer.

During the tax year she incurs the following expenditure:

- R 120 000 interest on bond
- R 36 000 rates and electricity
- R 36 000 paid to cleaner
- R 5 000 roof repairs
- R 12 000 cell phone expenses

Based on the above, Leigh-Ann does qualify for a home office deduction. The square meterage of her home office (20m2) in relation to her house (200m2) is 20/200 which is 10%.

Therefore Leigh-Ann’s home office deduction for the tax year =

10% X (R 120 000 +R 36 000 + R 36 000 + R 5 000) + R 6 666 = R 26 366.

You can also use our handy Home Office Calculator to assist with your workings.

Since she is not a commission earner, her cell phone expenses are not deductible.

For the 2021 year of assessment:

If you've been ‘locked-down’ working from home due to COVID-19, you'll only be able to claim a home office deduction if you end up working from home for more than six months of the tax year, provided you have an area of your home exclusively used and set up for this purpose.
This means, employees who've been working at home since South Africa’s lockdown started at the end of March, would need to remain at home until at least September in order to benefit from this tax deduction in the 2021 year of assessment.
 
If you submit a home office deduction, it is almost guaranteed that SARS will request supporting documents from you. We are seeing SARS take a very long time to finalise audits where there is a home office deduction claimed.
 
Supporting documents you will need to provide
 
1. Letter from employer stating that taxpayer can work from home, dates worked at home, reason for doing so, and whether or not an office is provided at employer's premises. Click here for letter template.
2. Schedule of home office expenses.
3. Calculation showing how this amount was arrived at and the apportionment. Click here for home office calculator.
4. Supporting invoices/ proof of payment for all  expenses. These must include at least one utility bill with physical address (affidavit if property is not owned by taxpayer).
5. For wear and tear on office equipment, employment contract or letter from employer, purchase invoice and calculation of claim. Click here for letter template.
 
We are also seeing SARS ask for:
 
- floor plans of your house (with the separate office clearly shown)
- photos of your home office (these should provide evidence that it is used exclusively for your work. If for example,  there is a bed and cupboard in it, it would indicate that it may double up as a spare room which would lead SARS to question its 'exclusive' use)
 
Newsflash: SARS has recently issued a draft interpretation note on the home office deduction which is being challenged by regulatory bodies due to its very narrow interpretation of the ‘exclusive use’ requirement, one issue being that  taxpayers who share a space (i.e two people share an office)  won’t be able to claim for home office costs. We still don't have a final answer on this and are awaiting a further update from SARS. Please submit as much proof as possible for your claim and be prepared to justify to SARS that you use your office exclusively and regularly for the purposes of your work only.
 
Impact on Capital Gains Tax:
 
While people are eager to claim the home office tax deduction in order to reduce their taxable income (and ultimate tax liability),  it's important to understand that claiming this expense may increase capital gains tax you will need to pay on your property when you dispose of it one day. For further clarfication, please read our blog here


Answer TaxTim’s simple questions to find out if you can deduct home office expenditure

Please also read TaxTim's FAQ on home office expenditure.



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