Working from home and claiming home office expenses

Working from home and claiming home office expenses

• 14 July 2021
• Individuals Tax
• The Tax Faculty Tax Specialist

This article is based on tax law for the year ending 28 February 2021. Please note that SARS Issued an updated Interpretation Note 28 (issue number 3) on 4 March 2022. Click here to read more. 

Author: Corlia Faurie

Working from home and claiming home office expenses

The “new normal” – a term used nowadays to describe a nation that has shifted from old school office based working, to setting up shop at home. For many, this migration has ensured that operations can continue without the risk of being exposed to COVID, perhaps even in a very comfortable manner. The comfort may however be disrupted by the question of whether taxpayers may claim tax deductions for this working arrangement and if so, whether it would be worth their while.

The misconception: as long as employers require or allow us to work from home, we would automatically qualify for any and every expense we incur at home.

The reality: even though we are working from home, many of us do not necessarily incur costs at home that we wouldn’t otherwise have incurred, even if we were to work at an employer’s office or a client’s premises. In light of this, it seems unreasonable for the taxpayer to expect the SARS to grant them additional tax benefits.

Although the tax law does not specifically require an individual to have incurred marginal costs for a home office to qualify for the deduction, it is fair to say that this was the original “spirit” of the deduction: to accommodate those that are potentially burdened financially due to working from home. The logic also follows that, where an individual does not incur significant marginal costs for a home office, it might not be worth the effort to attempt to claim it as a tax deduction, given the administrative burden of having to prove that it qualifies.

To answer the questions of who, when and what would qualify for a deduction, the SARS has issued guidance in the draft update to Interpretation Note 28. The qualifying criteria may be summarised under the following “tests”:

1. The Specifically Equipped test: is the area used as a home office equipped for the taxpayer’s trade? This may be an actual independent trade such as a hairdresser, or it could be employment provided that the Mainly test has also been satisfied.
2. The Regularity test: is the area used on a frequent basis as opposed to only incidental use?
3. The Exclusivity test: is the area used only for the taxpayer’s trade, and not used for any domestic activities or purposes? It may be argued that domestic use in the form of storage (i.e. closets or cupboards) should not pose a problem to meeting this requirement, as it is insignificant.
4. The Mainly test: does the individual perform their duties mainly in this area? This is currently based on the individual working from their home for more than 50% of the year of assessment. Commission earners may still qualify if they perform their duties mainly elsewhere than at the employer’s office.

Only if the individual is certain that the above criteria have been met, would the deduction become available. Having said that, even if the home office does qualify, the actual costs to be claimed as part of the deduction still needs to be considered carefully, as not all expenses are covered. A largely contended matter is the costs that may be claimed by those earning mainly commission, as opposed to salaried employees. Due to the limits entailed in Section 23(m), salaried employees are only allowed to claim expenses that relate to the premises itself, or expenses that are specifically provided for in this section. This has the result that items such as data or internet, cell phone and stationery costs are denied for salaried employees, whereas commission earners may still claim them.

The following costs might be considered as part of the deduction for both salaried and commission employees, provided that it actually relates to the home office area. Costs may be allocated based on floor space:

• Rent or interest on a bond
• Repairs and maintenance
• Rates, levies, cleaning and utilities
• Wear and tear on assets used in the trade

The backlash of having a qualifying home office is that the individual would lose out on the primary residence exclusion for it upon disposal of the property, as that part would have been used for trade purposes. It is important to note that the individual didn’t have to actually claim their home office expenses to trigger this adjustment for CGT – the trade use results in forfeiting the exclusion for that part.

It is crucial that the taxpayer keep records to prove that the home office and the expenses qualify for a deduction. Where possible, taxpayers should also obtain tax advice prior to claiming these deductions, as it is expected that the SARS will scrutinize this to confirm the validity of claims.

Webinar Commentary

Further webinar commentary on home office expenses can be accessed here.

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