Home Office Expenses – a silver lining in the pandemic?

With working from home becoming part of the so called “new normal” thanks to the Covid-19 pandemic, the working paradigm throughout the world has changed significantly. With employees either being required or choosing to work from home, the ability to claim home office expenses as a tax deduction has become a topical discussion among taxpayers amid the South African 2021 tax filing season.

But what expenses are taxpayers entitled to claim and under what circumstances? The South African Revenue Service (“SARS”) has released a lot of information to guide taxpayers and to shed some light on how the claiming of home office expenses will be treated. Some interesting (and worrying!) statistics show that a whopping 85% of returns in which taxpayers claimed a deduction for home office deductions were selected for audit/verification. Out of the pool selected for audit/verification, a massive 70% of the claims were denied as a deduction. This indicates that SARS is considering the expenses claimed carefully, therefore you need to ensure that you are well informed of the requirements listed below before clicking submit:

• You should be required to mainly work from home (50% or more);
• You must have a dedicated room equipped to be used for trade, i.e. the room must be used regularly and exclusively for trade purposes (i.e. not a spare bedroom or the dining room); and
• Actual expenses had to be incurred to enable you to work from home.

You should also have all your supporting documents on hand should SARS request proof of expenses incurred. SARS may request the following:

• A letter from your employer confirming the need for you to work from home;
• The floor plan showing the allocated room;
• Photos of the room to prove it is exclusively for trade purposes; and
• Proof of actual expenses incurred (e.g. rates & taxes, cleaning bills, and stationery costs).

The type of expenditure that is allowed to be deducted includes rental payments, repair payments, and other expenses relating to your home, such as rates and taxes, cleaning, office equipment, and wear and tear cost.

It is very important that a distinction is drawn between salaried employees and employees earning commission or similar income. Salaried employees can only claim expenses in relation to their actual physical premises. This means no deduction can be claimed against costs incurred for internet and communication. The value of these allowable expenses is also apportioned based on floor space of the work room compared to the full property. Commission earners can claim a deduction for expenses in relation to the premises and other allowable expenses, provided that they spend most of their time at home and not on the road or at client premises.

If you are a homeowner and choose to claim home office expenses as a deduction, take note that it will have capital gain tax implications if you sell your house in the future. The primary residence exclusion of R2 million which you are able to claim against the gain realised on the sale thereof will be reduced by the proportion and time for which you used the workspace. You would, however, still be entitled to your R40 000 capital gain annual exclusion.

If you are unsure about whether you could potentially qualify for a claim of home office expenses, get in touch before tax filing season ends.

How can we help?

How you structure your business is a critical question as you expand globally.  The right structure will protect your assets, improve your currency position, support your business operations, facilitate future business expansion and changes, and optimise your overall tax rate. Trying to unscramble a sub-optimal structure entered into in haste or without full consideration of relevant facts is complex and expensive, so it’s important to plan upfront.

Structuring an international business is both a science and an art – this is our specialist area of expertise. Regan van Rooy is an international tax and structuring advisory firm focussing on Africa. We have offices in South Africa, Mauritius and Ireland and we can help you with any international tax or structuring query.