In today’s article, I will be giving you a better sense of the requirements for claiming expenses relating to our home office and the implications of making such a claim. I am going to give you an overview of the law and its application around home office expenses.

This article serves to provide additional clarity for individual taxpayers who may be considering submitting claims for home office expenses in their income tax returns that can now be filed for the 2021 tax year.

Understandably, due to Covid-19, some individuals spent more time than usual working from home.

In considering whether to claim for any related expenses, it is important to note the following

There have been no changes to the legislation concerning a “home office”. The legal requirements remain the same as before the Covid-19 pandemic. In brief, this means:

An office, appropriately equipped, must have been set up at the place of primary residence;

The office must have been used regularly and exclusively for work purposes;

The office must have been used for more than 50% of the employee’s duties or, if the employee earns more than 50% of their remuneration from commission or other variable payments based on work performance, more than 50% of the employee’s duties must have been performed away from the employer’s office;

Any home office expenses must be linked to employment use and must be verifiable; and

Home office expenses must be claimed against source code 4028 in the income tax return

Where will I claim home office expenses on my Income Tax Return (ITR12)?

Should you qualify for a deduction in respect of a home office; enter the amount calculated next to the source code 4028 (Home Office Expenses) in the “Other Deduction” container on your Income Tax Return.

I want to complete the home office expenses but it does not reflect on the form wizard questionnaire?

When completing the form wizard on the Income Tax return (ITR12), answer the question “Did you incur any expenditure that you wish to claim as a deduction that was not addressed by the previous questions?” (Select ‘Y’ or ‘N’). If yes, the section for ‘Other Deductions’ will be added to the return.

Requirement for a home office

Applicable

Section 11(a)

Deduction

  • Expanding or losses
  • Actually incurred
  • In the production of income
  • Not of capital nature

 

Section 23(b)

Deduction

  • Part of domestic premises must be used for purpose of trade
  • The part which is used must be regularly and exclusively used for trade
  • Must specifically be equipped for thee for trade
  • For employees or office holders’ duties must be mainly (more than 50%) performed.

Section 23(m)

  • Prohibits deductions for employees unless their remuneration normally consists of more than 50%of commission
  • Does not apply to deduction contemplated in sections
  • Section 23(m) also create an exception for home
  • expense, provided they meet the requirement of section 23(b)
  • The part of the home i.e., the office space, for which a claim is submitted must be occupied for purposes of trade (which includes employment)
  • The office occupied must be specifically equipped for purposes of the trade eg a home study desk computer, and so forth.
  • The employee must regularly and exclusively use the office for business purposes ie it cannot be used for private purposes if an employee does not have a separate study or office available in their home, home office expenditure will not be allowed as a deduction
  • Employees who are not commission earners, but who spend the majority of their time on the road visiting client’s information their duties mainly at their clients’ premises do not qualify for a deduction/claim of home office
  • The employer must allow the employee to work from home, confirmation there will be a requirement upon and (not applicable to commissions earners)

Home Office Deduction

The expense of a capital nature are not allowed ie repayment on bond capital limited to interest to interest on the bond, the expense must be actually incurred, and in the tax year in question eg in 2021 Tax year is from (2020-03-01 to 2021-02-28) and all-expense incurred must relate to the home office

Example

Mollen had the following expenses

Calculation Of Expenses

Relevant invoices will be required upon audit otherwise the claim will be disallowed

Calculation of Apportionment

Floor Space of office (square meters)

Floor space of house (square meters)

5mx2m ,8mx12 =10m2/100m2 =10%

Below Are Examples Of Expenses That Can Be Claimed

  • Rent of the premises
  • Interest on a bond
  • Repairs
  • Rates and taxes
  • Cleaning
  • Other expenses in connection within the premises
  • Phone (only commission earners can claim for stationery)
  • Wear-and tear on office equipment
  • Calculate the area of your home office as a percentage of the total area of your home
  • Apply this percentage of the total expenditure in respect of the home, eg, rent bond interest, water and electricity, rates and add taxes, repairs
  • Add any other allowable expenditure eg wear-and-tear, etc
  • Ensure the calculate is available expenditure for SARS Inspection, along with all supporting documents (invoices, bond) statement, municipal bill, rental agreement, etc)

Home Office And  Capital Gains Tax

The primary residence for an individual is the first R2m of any capital gain or loss arising on the sale or the first R2m of proceeds from the disposal

When a part of your home is used as a home office and deduction is claimed for this part of your home is considered tainted for capital gains tax

Upon the sale home, the overall capital gain/loss will need to be apportioned between its tainted (trade) and untainted (private) elements

The primary residence exclusion can only be off against the untainted (private)portion of the capital gain/loss and the tainted (trade) portion of the capital gain must be fully brought to account

The tax impact that the home office has on the calculation of capital gains tax upon the sale of a property in the future could be considerable

The following example illustrates how the primary residence exclusion works and how a home office could affect the tax due on disposal.

What are the Capital Gains Tax implications if I sell my house used partially for trade?

The first R2 million of a capital gain or capital loss on the disposal of a primary residence must be disregarded for Capital Gains Tax (CGT) purposes. If the proceeds in respect of the disposal of the primary residence are R2 million or less, any capital gain thereon must also be disregarded.

However, if a primary residence has been used by a taxpayer partially for purposes of carrying on a trade, such as in the case of a taxpayer that makes use of a home office, then the primary residence exclusion of R2 million must be apportioned for the non-residential use; and the R2 million-proceeds rule for disregarding any capital gain does not apply to the part of the premises used for purposes of trade.

The apportionment will be based on the proportion of the floor area used for business and private use and must be applied to the total capital gain to arrive at a private portion of the capital gain, and a business portion of the capital gain.

Where the home office is in taxpayer-owned property, taxpayers should note that formally defining part of a primary residence as a home office will most likely have an adverse impact on a future capital gains determination. The home office area will, on a pro-rated basis, be excluded from the primary residence exclusion of R2 million on disposal of the residence.

Careful consideration should, therefore, be given before a claim for home office expenses is made. Taxpayers may also find that working from home led to savings on expenses they would otherwise have incurred, like transport, wear and tear on vehicles, and so forth. Taken together with the loss of part of the capital gains exclusion, these savings may outweigh the benefit of a claim for home office expenses.

Whilst all claims for home office expenses may be subject to further verification or audit by SARS, it is important to note that there is a high likelihood that a taxpayer who claims home office expenses for the first time will be selected for verification or audit.

Record Keeping

  • Documentary proof is essential to enable you to claim actual expenses incurred
  • Expenses may be overlooked unless you record them at the time they are incurred
  • To enable you to complete your tax returns accurately
  • All documents must be kept for a period of 5 years

Conclusion

I understand SARS Home Office Tax Requirements can be a lot for you to prepare and you may lack knowledge of what is required Hence, I highly recommend you hire a reputable accounting firm to help you and significantly save the stress, time, and money you could otherwise incur over time.

 

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