Article provided by Paymaster
The way we work today has changed considerably. Old-school management scoffed at the once, seemingly impossible idea of a virtual commute that new-school employees would be traveling into work-cyberspace. Much to the surprise of the old-school, today however, the virtual commute into work-cyberspace has become a reality for many employees.
There are a growing number of ‘office-based’ employees now working from home—their own home office is well established and geared for productive commercial engagement with clients and fellow employees alike. It’s true and it’s here to stay: many employees are now working from home.
Working from home does not come without the need to make provision for some running costs. The South African Revenue Service (SARS) has made a special allowance for the growing number of people that work from a dedicated home office. Under certain conditions, expenses for a formal home office setup that may be incurred by an employee working from home can be deducted under “Other Deductions” in the ITR12.
What is allowable for salaried employees who work from home?
Certain conditions must be met for salaried employees who work from home. Unlike sole proprietors or freelancers, a home office worker can only claim a percentage of certain expenses, and what can be deducted varies depending on how the employee is remunerated.
The basic rules around deducting home office expenses
Some basic requirements must be met before a taxpaying employee can deduct expenses related to a home office. Unless these basic rules and requirements are established and met, no claim can be made. These are:
- The person claiming must be a tax paying employee
- The employee must have permission from the employer to work from home
- More than 50% of the working hours must be spent working from the home office
What is a home office?
SARS states that a home office must be an exclusive and dedicated area of the home set aside for work. Essentially this must be a separate office or office space that has to be maintained for undertaking the duties required as a salaried employee.
The home office must be equipped for the purpose of the employee’s trade and the duties of the role they are employed for. This means having the required instruments, tools and equipment to perform the duties expected. For example, an architect or interior designer might well have a drawing board.
Meetings held for work purposes must be able to be held in the home office — sitting around the dining room table for example, does not qualify.
What can be deducted?
This is the question nearly everyone who has a home office asks and spends more than 50% of their working week at home. Thankfully this has been covered in some detail by Paymaster in this recent article. Additionally, the South African Revenue Service (SARS) has all the relevant information on their website and Interpretation Notes like this: Deductions of home office expenses incurred by persons in employment or persons holding an office.
The salary structure of the taxpayer is a good starting-point to determine what may be deducted and what is allowable for a particular category of home office worker. At this point, two things are important at this point:
- is the taxpayer a commission-earner who is paid 50% or more of their remuneration as commission or bonuses? Or,
- is the taxpayer a general salaried-employee with commission or bonuses being less than 50% of their total salary?
These two types of remuneration determine the fundamental differences in what can be deducted for a home office and are often the reason for confusion with tax returns.
What Can Commission earning taxpayers deduct?
Commission earners may deduct a percentage of:
- Rent
- Bond Interest
- Rates and taxes
- Cleaning
- General wear and tear/maintenance
- Commission Earning Related Expenses: Phone, Internet Access, Stationery, computer repairs, etc.
What can non-commission earning taxpayers deduct?
Non-commission earning taxpayers may deduct close to the same or similar items as commission earners, bar the commission-earning related expenses that a commission earner would claim for.
For a full interpretation of what can be deducted the already-referenced SARS Interpretation Note, No. 28 clarifies things.
How much can be deducted?
To calculate the amount that can be deducted from your tax return, a simple calculation about your home office, your home and expenses needs to be applied. The amount deducted is calculated as a percentage. This value is the size of your office in relation to the total square meterage of the home itself. The office may be a spare room, or in some case, might even be a garage. The area of this room, measured as a percentage of the overall property, translates into the percentage of the costs and expenses incurred that a taxpayer may deduct.
What is not allowed to be deducted?
Many home-based employees need to make small changes to their property in order to create an exclusive office space as set out in the requirements from SARS. This is one of the more disputable (or grey) areas when submitting home office claims. By rights, these costs cannot be deducted as these are a capital cost, and capital costs cannot be deducted. The cost of building an extension to become a home office certainly cannot be deducted, although many do try. Likewise, the capital cost of purchasing office furniture and equipment cannot be deducted, but the maintenance of such furniture and equipment items can be deducted.
A typical example of a home office calculation
The calculation of the amount that may be deducted is straightforward. However, knowing what may and what may not be deducted is the greater challenge. For example:
“Nikky is an interior designer who works for a large company. She receives only a salary as remuneration and earns no commission. She is allowed to work from home three or four days a week. For this purpose, Nikky has had her spare bedroom converted into an office. Nikky has a computer, a drawing board and all the tools she needs to perform her duties from home. She purchased these items two years ago for R30,000, Nikky’s office is 15 m2 (square metres), representing a 10% fraction of her 150m2 (square metre) home.”
Nikky’s expenditure for the tax year is:
- R100,000 Bond Interest
- R25,000 Rates and Electricity
- R20,000 paid for a cleaner
- R4,000 for house repairs
- R9,000 cell phone costs
Using the listed information:
1. Nikky does qualify for a home office deduction with her tax return.
2. Nikky’s office is 10% of the total size of her property. Therefore she can claim 10% of the costs she is permitted.
For the tax year, Nikky’s home office deduction would be:
10% x (R100,000 + R25,000 + R20,000+R4,000) = R14,900
Nikky may not deduct her cell-phone costs because she is not a commission earner.
In Summary
Most of the time, home office deductions are relatively straightforward and that which is allowable is common sense. However, completing and submitting a tax return can be complicated for some people. For this reason, it’s worthwhile consulting a professional tax advisor. Alternatively, why not contact a professional Paymaster People Solutions advisor for more assistance.