Print Page
News & Press: TaxTalk

Deducting your home office expenditure

Monday, 15 July 2019   (0 Comments)
Posted by: Author : Nicci Courtney-Clarke
Share |

Author : Nicci Courtney-Clarke

Salaried employees who work from home may be able to claim a home office deduction if certain conditions apply.

Work culture has evolved massively and “flexible employment” has become the new buzz term. Many workers are given the option to work from home to avoid productive time being lost due to the daily commute to an office. SARS allows such employees to deduct their home office expenses within the “Other Deductions” section of the ITR12 form. However, all this is only allowed under certain specific conditions.

It is important to understand that the situation is different for sole proprietors or freelancers who also work from home. They can automatically deduct all their home office expenses and do not need to work through the same stringent set of conditions applied to employees to see whether they qualify for a deduction. The relevant portion of home office expenses can simply be reflected within the "Local Business, Trade and Professional Income" section of the ITR12 form.

What are the requirements to deduct home office expenditure?

  • The employer must allow the employee to work from home.
  • The employee must spend more than half of their total working hours working from their home office.
  • The employee must have an area of their home which is used exclusively for this purpose. For example, employees who meet clients in their dining room at home would not qualify. A separate office, which is used specifically for the employee’s work, must be maintained to qualify for the deduction.
  • The office must be specifically equipped for the employee’s trade, i.e., it must be specially fitted with the relevant instruments, tools and equipment required for the employee to perform his or her work.

What expenses can be deducted?
Firstly, one must look at the employee’s remuneration structure to confirm whether he or she:
  • Earns more than 50% of total remuneration either from commission or some other variable form based on work performance; or
  • Is a normal salaried employee with variable payments or commission making up less than 50% of his or her total remuneration?

The first group (i.e., commission earners) can claim pro-rated deductions based on rent, interest on mortgage bond, repairs to the premises, rates and taxes, cleaning, wear and tear, and all other expenses relating to their house. In addition, they can also take other commission-related business expenses, such as telephone, stationery and repairs to the printer, into account.

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

How to calculate the home office deduction
First calculate 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. Then, apply this percentage to the home office expenditure to calculate the portion that is deductible.

Example
Lesedi is a graphic designer who works for Company A. Her remuneration only consists of a salary. Her company promotes a flexible work culture and allows Lesedi to work from home three days a week. She has a separate office at home which is fitted with a computer and printer, which she uses exclusively for her graphic design job. The computer and printer were purchased two years ago for R12 000 and R8 000, respectively. Her office is 20m2 and the floor space of her entire home, including the office, is 200m2.

Let us assume that SARS allows for a three-year depreciation period for the computer and printer.

Also, during the 2019 tax year, she incurs the following expenditure:
  • R120 000 interest on mortgage bond
  • R36 000 rates and electricity
  • R36 000 cleaning costs
  • R5 000 roof repairs
  • R12 000 cell phone expenses

Based on the above, Lesedi qualifies for a home office deduction. The square meterage of her home office (20m2) is 10% in relation to her house (200m2).

Therefore, Lesedi’s home office deduction for the tax year can be calculated as follows (note that since she is not a commission earner, her cell phone expenses are not deductible): 10% x (R120 000 + R36 000 + R36 000 + R5 000) = R19 700

Since Lesedi is a salaried employee, she would enter her home office expense claim within the ‘Other Deductions’ section of the ITR12.

The importance of supporting documents
SARS often requests supporting documents from taxpayers to back up their home office deductions. Taxpayers must be aware that they have to submit scanned copies of invoices, as well as all relevant calculations to substantiate the percentage of home office expenses claimed (a spreadsheet or list of expenses will not suffice). They must also ensure that the supporting documents can easily be reconciled with the home office claim on their ITR12. If the backup is unclear or insufficient, SARS will disallow the deduction altogether.

Beware of the impact of your home office deduction 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), few people understand the negative tax impact a home office will have on the calculation of their capital gains tax when they sell their property one day.

When taxpayers sell the home in which they live, there is a primary residence exclusion of R2 million. This means the first R2 million of the capital gain (or loss) is excluded for the purposes of working out capital gains tax. All individual taxpayers receive an additional R40 000 capital gains exclusion per year.

However, if the taxpayer worked from home and used part of the house as an office, the Income Tax Act requires the capital gain to be apportioned between primary residence use and business use. This apportionment must take into account the length of time that the home office was used as a portion of the entire period of ownership, as well as the size of the home office compared to the size of the entire property.

Example
Isabel purchased a home in February 2007 for R1.2 million. In February 2015, she carried out renovations for R300 000 to add on an office from where she worked until she sold her home in February 2019. The office space made up approximately 10% of her total house space (i.e., it was 10 m2, while her entire home was 100 m2) and she therefore claimed 10% of her house running costs as a tax deduction against her business income.

 

She lived in this home until February 2019 when she sold it for R3.5 million. Her taxable income for 2019 was R500 000.

THE CAPITAL GAINS CALCULATION

Proceeds: R3 500 000

Base cost: R1 200 000 + R300 000 = R1 500 000

Capital gains (proceeds – base cost): R3 500 000 – R1 500 000 = R2 000 000

Portion of the capital gains attributable to the property’s use as a home office (10% for 4 years out of 12 years): R2 000 000 × 4/12 × 10% = R66 666

Portion of the capital gains attributable to the property’s use as a primary residence: R2 000 000 – R66 666 = R1 933 334

Less primary residence exclusion: R1 933 334 – R2 000 000 = nil
Total capital gains: R66 666
Less: annual capital gains exclusion: R66 666 – R40 000 = R26 666

The inclusion rate for capital gains is 40% for individuals. This means that 40% of the gains (i.e., R26 666 × 40% = R10 666) is added to Isabel’s taxable income and will be taxed at her marginal rate of tax.

If we assume her marginal tax rate is 36%, then approximately R3 840 capital gains tax will be payable (i.e., R10 666 × 36%).

If Isabel had not used part of her residence as a home office, the capital gains tax on the disposal of her property would have been nil due to the primary residence exclusion being applied to the total gain of R2 million.

Isabel would have to compare the amount of capital gains tax (R3 840) with her annual tax saving from the home office deduction to decide which is more advantageous from a tax perspective. It seems likely that it would be worthwhile for Isabel to claim home office expenditure annually, because the tax benefits would outweigh the capital gains tax she would need to pay on disposal.

Note that on Isabel’s ITR12, she must report the details of the property sale as two separate transactions. This is done by indicating in the opening wizard that two disposals took place. This will open up two capital gains/loss sections so that the details of each can be captured separately. For the primary residence exclusion to be correctly applied, she must pro-rate the proceeds and the base cost for each disposal, so as to reflect the primary residence portion separately from that of the non-primary residence portion.

Click here to complete the quizz

This article first appeared on the July/August 2019 edition of Taxtalk Magazine.


Access the latest COVID-19 information by checking our COVID-19 Member Notice Board
 

WHY REGISTER WITH SAIT?

Section 240A of the Tax Administration Act, 2011 (as amended) requires that all tax practitioners register with a recognized controlling body before 1 July 2013. It is a criminal offense to not register with both a recognized controlling body and SARS.

  • Tax Practitioner Registration Requirements & FAQ's
  • Rate Our Service

    Membership Management Software Powered by YourMembership  ::  Legal