By Gary Mclean | Charteris & Barnes
The Covid-19 pandemic has caused great hardship and the lockdown, which was intended to mitigate its effects, has changed life as we know it. Lockdown has left most people immobile and working from home has become essential for the survival of companies and earning an income.
The question arises as to whether the expenses incurred as a result of working from home, such as electricity, rent or mortgage bond repayments, can be claimed as a tax deduction against the income earned by employees. The answer is not a simple yes or no.
A deduction is only allowed from the income derived by a person from carrying on a trade. In the Income Tax Act, unless the context otherwise indicates, “trade” includes every profession, trade, business, employment, calling, occupation or venture.
Section 23(m) of the Income Tax Act prohibits the deduction of any expenditure, loss or allowance which relates to any employment or office held by any person in respect of which he or she derives any remuneration other than an agent or representative whose remuneration is normally derived mainly (more than 50%) in the form of commissions based on his or her sales or the turnover attributable to him or her.
Only the following expenditure may be claimed as a deduction against remuneration:
An employee who earns remuneration that does not mainly consist of commission, can consequently claim deductions in respect of that part of a private home used as a home office (therefore for the purposes of trade) if that part is specifically equipped for purposes of his trade, and that part is regularly and exclusively used for his trade and the employee’s duties are mainly performed in that home office.
In order for a part of a private home to be considered “specifically equipped” for the purposes of trade, that part must be fitted with the instruments, tools and equipment required to conduct that trade. Taxpayers who meet clients at their homes would not be permitted a deduction under this head if they meet their clients in their dining or sitting rooms. A separate office would need to be equipped and maintained.
The Concise Oxford Dictionary defines “regularly” to mean “done or happening frequently” and “exclusively” to mean “excluding or not admitting other things; excluding all but what is specified”. A deduction is thus not permitted where it is evident that the taxpayer conducts any activities of a private nature in the part used for trade, such as permitting children to use the room as a playroom. Typically, home office expenditure will be the type of expense referred to in section 23(b), namely rent of the premises; interest on bond; cost of repairs to the premises; and other expenses in connection with the premises.
In addition to these expenses, other typical home office expenditure may include phones; stationery; rates and taxes; cleaning; office equipment; and wear-and-tear. 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.
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.
If you have a home-based business that is registered for VAT, you can also claim VAT input credits on the costs of maintaining the premises in which that business is housed. However, be careful not to claim a VAT input credit on the cost of any additions or alterations you make to your property to accommodate a home office or home business.
This is because if you claim a credit for building work done to add an office, for example, or to convert the outbuildings, SARS will expect you to include VAT in the price of the whole property when the time comes to sell it. There is nothing in the requirements of the ITA to suggest that the home office deduction applies only to persons who will work from home indefinitely, for the full period of their employment, or that persons who temporarily works from home due to circumstances such as those faced by South Africa at the moment, should be excluded.
As long as the home office is used regularly (and all other requirements are satisfied). There is no specific rule that defines what “regularly” means in this context. SARS, in its Interpretation Note 28, states that a typical example of the use of a home office that is not regular in this context is a home office that is maintained and is only used occasionally, for example, once on a weekend due to the taxpayer maintaining a separate business premises, is not used frequently enough to constitute regular use.
Allowance paid by employer Interpretation
Note No 14 (Issue 4) dated 18 March 2019 explains the term. An allowance is an amount of money granted by an employer to an employee to incur business related expenditure on behalf of the employer, without an obligation on the employee to prove or account for the business-related expenditure to the employer. The amount of the allowance is based on the anticipated business-related expenditure. All amounts paid or granted by a principal to a recipient (the person receiving the amount, for example the employee) as an allowance or advance must be included in taxable income to the extent that the allowance or advance or a portion of the allowance or advance is not exempt from normal tax under section 10, or has not actually been expended for the specific purposes stated in the case of travelling on business, subsistence and the holding of a public office.
Since the gross amounts in respect of all other allowances (except travelling on business, subsistence and the holding of a public office) or advances are included in taxable income (as the final taxable amount), no expenditure can reduce the amount of such allowances or advances to be included in taxable income. The full gross amounts of all other allowances, for example clothing allowances, child-care allowances, allowances for the use of a cell phone or entertainment allowances, are consequently included in taxable income as the final taxable amount. Reimbursements from an employer have the benefit of not being taxable, as they do not constitute remuneration.
Another benefit is that the home office does not have to meet the specific requirements that lift the applicability of section 23(b) and section 23(m). However, the employee must bear the office expense first, and keep all invoices and receipts to be able to claim the amount from the employer, and the expense must be a concomitant on your rendering services to your employer. The reimbursed expenditure however must be bona fide expenditure in relating to the employer’s trade being carried on.
Advances from employers
An advance entails receiving an amount from your employer to be used for your home office expenses. Advances have the same benefits as reimbursements. However, the expense must also be affiliated to the rendering of your services to your employer, and all invoices and receipts must be kept. If the advance is excessive and not fully utilised by the employee, the employer will claim the excess from the employee, and if the advance is deficient, the employee will claim a reimbursement from the employer.
No-value fringe benefits
In terms of the Seventh Schedule of the Income Tax Act, certain fringe benefits will be deemed to have no-value. Any communication service provided to an employee will not be taxable if the service is used mainly (more than 50 percent) for the purposes of the employer’s business (Paragraph 10(2)(c)), for example Wi-Fi. A meal or refreshment supplied by an employer to his employee in a canteen, cafeteria or dining room wholly or mainly used by his employees, or on the business premises of the employer, or during business hours or extended working hours, or on a special occasion will also constitutes a no-value fringe benefit. Therefore, reimbursement for coffee expenses to by consumed at a home office will not be deductible from tax as it needs to be consumed at the employer’s business premises. Thus, as can be seen from the above discussion, several planning tools is available to accommodate employees during the Covid-19 pandemic. However, care should be taken when considering the tax implications of these decisions. For any method elected, evidence must always be maintained to discharge the onus that an amount is deductible, or not taxable.