The benefits of working from home
With the Covid-19 pandemic, the world changed overnight. And with these changes came new ways of doing things – some of them overwhelmingly positive. The joy of not having to deal with a long commute in peak hour traffic, which meant you got to lie in for just that little bit longer. It also freed up some time to do more of what you love (Baking Banana bread anyone?). Most of us had to learn to navigate the brave new world that is Zoom meetings – and some of us even attended court in our slippers. While the jury is still out on whether spending more time with your spouse is a benefit, there are definite benefits to working from home.
Are you eligible for work from home tax benefits from SARS?
In order to reduce the spread of Covid-19, the SA Government encouraged employers to allow employees to work from home whenever possible, and as a result “flexible work arrangements” and the additional financial pressure on employers to reduce overhead costs, like office space, has led to more and more people working from home and setting up a workplace in their home. This has created an opportunity for many employees who did not previously claim home office expenses as tax deductions, to do so. This is likely to become more prevalent, if working arrangements move away from offices and more towards remote working. The South African Revenue Service (SARS) allows certain taxpayers to deduct their home office expenses from their taxable income, provided that the requirements of the Income Tax Act No. 58 of 1962 (the Act) are met.
Guidance on the deductibility of expenses relating to a home office
Interpretation Note 28, Issue 2 (as issued by SARS on 15 March 2011) provides additional guidance on the deductibility of Home Office Expenses. The general rule is that the deductibility of expenses relating to a home office is determined with reference to section 11, paragraphs (a), (d) and (e), read together with sections 23(b) and 23(m). This means that for a home office expense to be deductible the requirements of sections 11, 23(b) and 23(m) must all be met. We briefly address below the position of both a self-employed individual or independent contractor, and a person in employment (an employee) earning remuneration. Sole proprietors and independent contractors Individuals who are not in employment and who do not receive remuneration may claim pro-rata home office expenses if the home office space is: — specifically equipped for the purposes of trade; and — regularly and exclusively used for trade purposes. There are two scenarios to consider as relates to employees. 1. Employees who do not earn mainly commission income: If an employee does not earn mainly (more than 50%) commission income or variable payments, he/she may potentially still be able to claim home office expenses as a deduction against taxable income. These employees must also be able to show that they have worked from their home office for more than 50% of the tax year. They may deduct the pro-rata costs related to:
- Interest on a mortgage bond
- Repairs to the premises
- Rates and taxes
- Cleaning and all other expenses in connection with the dwelling
- They may also claim wear and tear as stipulated in Section 11(e) on computer hardware and software, office furniture and office equipment (where owned by the employee and not the employer)
2. Commission earners. Employees earning more than 50% of their total remuneration from commission or some other variable payments, based on work or performance, whose employment duties are mainly (more than 50%) performed from the home office, would be allowed to claim the same expenses as employees who do not earn mainly commission. However, in addition, they may claim other commission-related business expenses, such as:
- Data costs
- Repairs to the printer
Calculation of your home office expense deduction
The qualifying home office expenses are tallied for the tax period impacted. The home office claim is calculated as a percentage of the square metres of the home office over the total square metres of the entire dwelling. It is important to note that some costs are not subject to the pro-rata formula e.g., wear and tear on office equipment (the calculation for wear and tear is specifically stipulated in Section 11(e) of the Act).
Claiming home office expenses on your annual income tax return (form ITR12)
The calculated home expense deduction should be included under the “Deductions” section on the ITR12 form. It is important for the taxpayer to retain supporting documents that may be required by SARS for a period of five (5) years in order to validate the deduction claimed. SARS may require the uploading of supporting documents for all such claims and may seek to audit the expenses claimed in many cases.
Capital Gains Tax implications
Please take note of any Capital gains tax implications. When a taxpayer disposes of an asset such a house or property, a capital gains tax event arises. Where a residence is partly used for business purposes (such as a home study), the primary residence exclusion must be reduced by considering the period of business use as well as the size of the area used for business purposes. This should be taken into consideration when claiming this deduction, as it may create a higher capital gain in the employee’s hands later on sale of the property. Finally, please consider Interpretation Note 28, which is an effective guide to make decisions regarding qualifying expenses.Please contact us today to see how we can assist you.