Deducting Home Study Expenditure

Deducting Home Study Expenditure

• 13 July 2020
• Individuals Tax
• PJ Nel - SAICA

Many employees will be wanting to deduct, for tax purposes, expenses relating to the use of a part of their domestic premises during the lockdown period. This article discusses the requirements in order for them to do so.

As part of the COVID-19 measures many employers were required to adopt measures to promote physical distancing of employees and this specifically included “enabling employees to work from home or minimising the need for employees to be physically present at the workplace”. The question is whether the employee can make a deduction, for tax purposes, of expenses incurred in respect of the part of their domestic premises which is used for purposes of earning their remuneration during this period and possibly thereafter as well.

The relevant legislation 

The law allowing for the deduction of expenditure related to what is colloquially referred to as a study at home, is found in section 23(b) of the Income Tax Act. But, because an employee is in receipt of remuneration, the general rule, found in section 23(m) of the Act, also applies. It actually prohibits an employee from deducting “any expenditure, loss or allowance, contemplated in section 11, which relates to any employment … in respect of which he or she derives any remuneration, as defined in paragraph 1 of the Fourth Schedule …” This remuneration, simply put, is essentially anything that appears on an IRP5 or IT3(a).

An exception to this general rule, does allow for the expenses in respect of any rent of, cost of repairs of or expenses in connection with any dwelling house or domestic premises to be deducted.  Of course, the expenditure must, in the first instance, qualify for deduction in terms of the provisions of the Income Tax Act, but these expenses will then only be allowed to the extent that the deduction thereof is not prohibited under section 23(b) and relate to the trade use.

What are the requirements of section 23(b)?

The relevant section 23(b) requirements can be broken down as follows:

• The taxpayer’s trade must constitute an employment.
• The taxpayer must have incurred specific expenses, being “rent of or cost of repairs of or expenses in connection with any premises”.
• The term “any premises”, is then qualified as referring to “any dwelling-house or domestic premises” in respect of which a part thereof is “occupied for the purposes of trade”.
• The part so occupied
  • must then be specifically equipped for purposes of the taxpayer’s trade;
  • must be regularly and exclusively used for such purposes; and
  • his (or her) duties must mainly be performed in such part.

Practical application:

Let’s apply the above requirements to expenditure incurred by an employee, who was requested to work from home, during and after the lockdown period. For purposes of the article it is accepted that the remuneration of the individual is not derived from commission or other variable payments.

The first requirement is met, namely that the individual is carrying on the trade of employment.

The individual incurred domestic or private expenses in respect of his or her home. In SARS’s view 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”; and also that “expenditure such as maintenance, rates and taxes and wear-and-tear on office equipment would usually satisfy the requirements of section 11” - see Interpretation Note: No. 28 (Issue 2). 

One would expect that interest on a bond, obtained to acquire the domestic premises, a part of which is used for purposes of earning the remuneration, should also be an expense incurred in connection with the domestic premises. The deduction thereof however is made under section 24J(2) and not under section 11(a), as is required by section 23(m).

SARS, in their practice generally prevailing, refers to a taxpayer who maintains a home office and then includes the expenses of “cleaning” the part so used. It is submitted that this may not actually qualify as a cost of repairing the study. The cost of renovating, or improving the study at home in order to specifically equip it, would also not be a repair and no deduction thereof is permitted.

If the taxpayer were to repair his or her laptop computer, the expense would not qualify as a deduction. It is not in connection with the premises and is also not allowed under section 23(m).

The individual cannot make a deduction of the full amount of the qualifying expenses. It is common to determine the trade part of the expenses, by using the total area (square metres) of the home study in relation to the total area of the house. It may well be that this formula is not a reasonable apportionment of, for instance, electricity used, and internet connection costs, but in practice, most taxpayers see this as part of the total cost and uses the formula to determine the trade use element thereof as well.

It is better for the employer to reimburse the employee for the business-related cell phone cost or the cost of a communication service that is not by way of a landline, as the employee would otherwise not be able to make a deduction thereof. The same applies to stationery or other consumables used for trade purposes.

Please click here to read more.

This article first appeared on saica.co.za.

0 COMMENTS

LEAVE A COMMENT