DO YOU QUALIFY FOR THE HOME OFFICE TAX DEDUCTION?

DO YOU QUALIFY FOR THE HOME OFFICE TAX DEDUCTION?

  1. Introduction

    In recent years remote work-from-home arrangements for employees have become more prevalent in South Africa, mainly due to the Covid-19 pandemic and the lock-down regulations.  Technological advancements and the growing affordability of internet access have also enabled this shift.

    Where an employee performs his or her duties in a designated home office, a home office tax deduction may be available, but only if certain strict criteria are met.  This article aims to provide general guidance regarding the home office tax deduction.

  2. Requirements to qualify for a home office deduction

    Before a taxpayer may claim a home office deduction, the following requirements must be met: 

    1. Use: The designated room must be used exclusively for home office purposes.  No dual use for private purposes is permitted.
    2. Time: The taxpayer must work more than 50% of the time at the home office during the tax year.
    3. Area: Only expenses directly related to the floor area of the home office may be claimed.
    4. Expenses: Only permitted expenses (see lists below), actually incurred, may be claimed.
    5. Proof: The taxpayer must be able to fully substantiate the home office deduction being claimed, as the onus of proof is on the taxpayer.
  3. List of allowable expenses (not exhaustive)

    1. Repairs & maintenance specific to the home office: Costs for repairs or maintenance directly related to the home office space, such as replacing the carpet in the home office room.
    2. Repairs & maintenance for the entire property: Painting the whole house, for example, with a portion (based on floor area) attributed to the home office. 
    3. Rent: The proportion of rent paid corresponds to the home office area as a percentage of the total floor area.
    4. Municipal charges: Rates, taxes, and other municipal service charges (e.g., water, sewerage, and refuse removal) applicable to the property, apportioned to the home office floor area.
    5. Electricity: Apportioned electricity charges associated with the property.
    6. Levies: Apportioned property-related levies.
    7. Homeowner’s insurance: Insurance premiums that cover property damage, to the extent that they relate to the home office floor area.
    8. Security costs: Apportioned month-to-month security expenses.
    9. Cleaning costs: Expenses specifically for cleaning the home office.
    10. Solar power systems: This is a technical category which will require a case-by-case analysis as an available deduction (if any) is heavily reliant on the specific facts and variables of each case. Sections 12BA and 6C have also been recently introduced which further complicates the matter.  
    11. Wear and tear allowances: Allowances for depreciation on certain fixed assets, per section 11(e) of the Income Tax Act, as specified in the annex to SARS Interpretation Note 47.
    12. Internet fiber installation costs: Deductibility of installation costs may vary based on individual circumstances, requiring a case-by-case evaluation.
  4. List of expenses not allowed (not exhaustive)

    1. Repairs & maintenance unrelated to the home office: Repairs or maintenance in areas not related to the home office, such as the kitchen or garage, are not claimable. 
    2. Bond interest: SARS disallows the deduction of bond interest regarding a home office tax deduction.  However, the South African Institute of Chartered Accountants disputes SARS’s interpretation.  While bond finance costs may potentially be deductible, challenging SARS’s stance would likely require litigation in the Tax Court, which can be costly. 
    3. Bond insurance: This is normally life insurance and is therefore prohibited from being deducted. 
    4. Household insurance: This expense relates to the contents of the premises and is therefore not deductible, as it does not relate to the premises itself. 
    5. Integrated solar power systems: Solar systems that are permanently integrated into the home structure and effectively become part of the house are not eligible. 
    6. Non-premise-related expenses: Expenses not directly incurred in connection with the premises or building are not deductible, including: 
      • Phone costs (including the monthly charges) 
      • Stationery 
      • Office furniture 
      • Tea, coffee and other refreshments 
      • Monthly subscription fees for fiber or internet access 
  5. Burden of proof & record keeping

    The burden of proof is on the taxpayer to demonstrate that an amount relating to a home office is tax deductible.  This is in accordance with section 102 of the Tax Administration Act. 

    The taxpayer must provide evidence to support the following in case of a verification or audit: 

    1. Use: The room was exclusively used for home office purposes, with no dual use for personal activities.  For instance, a spare bedroom that also serves as an office would not qualify.  SARS may request photographs or other suitable evidence before allowing the deduction.
    2. Time: The taxpayer must demonstrate that he or she worked in the home office for more than 50% of the year.  For example, if an employee is expected to work 48 out of 52 weeks per year at an average of 40 hours per week, they would need to work at least 961 [(48 x 40)/2 +1] hours in the home office during the year of assessment to qualify.
    3. Area: The taxpayer must provide proof to SARS of the floor area of the home office space.  This could include providing SARS with a copy of the floor plan, showing the area of the office in relation to the total area of all buildings on the property, etc. 
    4. Expenses: Proof regarding the nature and actual occurrence of all expenses which the taxpayer is seeking to proportionally deduct (i.e. home office area to total house area), must be readily available for a SARS audit.  This can include slips, invoices, account statements, contracts, etc.


    To successfully claim said deduction, the taxpayer must fully comply with all the stated requirements and convince the SARS auditor that they indeed meet each condition. 

    The burden of proof could therefore be onerous.  If the taxpayer cannot prove one or more of the above points, the entire deduction could be disallowed by SARS. 

    All supporting documentation must be retained for five years from the date of assessment. 

  6. Capital Gains Tax (CGT) considerations

    When a primary residence is sold by a natural person, the first R2 million of the capital gain (if any) is disregarded for CGT purposes.  This is known as the primary residence exclusion.

    However, if the taxpayer previously claimed a home-office deduction, the capital gain or loss on the disposal of the primary residence must be apportioned between its tainted (part of the primary residence used for business purposes) and untainted elements.

    The untainted portion of capital gains will qualify for the full R2 million primary residence exclusion, capped at the value of the untainted portion.  The tainted portion must be included in the capital gains calculation, subject to the R40,000 annual exclusion and the applicable CGT inclusion rate.

    Apportioning the capital gain or loss will depend on the specific facts and circumstances, which may include factors such as floor area, time used for each purpose, or a combination of these methods.

If you have any enquiries, please do not hesitate to contact Petri Westraadt at pwestraadt@fhbc.co.za

Source Reference:

  1. The Income Tax Act No. 58 of 1962 (s11(a), s11(d), s11(e), s23(b) & s23(m)
  2. The Tax Administration Act No. 28 of 2011 (s102)
  3. SARS Interpretation Note 28 (issued 4 March 2022)
  4. SARS Revised Interpretation Note 28 (IN 28) – Draft Briefing Note
  5. SAICA Comments on the Final Interpretation Note 28 (Issue 3) (issued 22 March 2022)