“We like to give people the freedom to work where they want, safe in the knowledge that they have the drive and expertise to perform excellently, whether they at their desks or in their kitchen. Yours truly has never worked out of an office and never will.” (Richard Branson)
For many of us, “Working from Home” has become the new standard operations, and it does not look like it will be changing anytime in the future.
This new “normal” creates tax deductions for both the employee and employer and creates many new tax angles that both parties should familiarise themselves with.
Right now, I guess it creates many questions, such as “when do I qualify for tax deductions?”, “What expenses am I allowed to deduct?” We are going to try and cover the most common scenarios but please feel free to contact BI Prime if you feel your case is somewhat special or you didn’t get your answer from this post.
Note: we are working on writing a post that will explain the possible impact of claiming for a home office on your Capital Gains Tax liability when you sell your house – this depending on interest and amount of homeowner followers on our blog. So be sure to express your interest then you will get that post in the future.
Employees stand to reap a range of financial and health benefits from working at home and both they and their employers should know that they may also be able to claim certain home office expenses as tax deductions. Normally only independent contractors and commission-earners would claim these expenses, but SARS has confirmed the relief is available to full-time employees as well – but only in the specific circumstances set out in the Income Tax Act.
A) How you can claim tax deductions for a home office
The Income Tax Act sets out basic requirements that must be met if this tax relief is to apply:
1. You must practice a “trade” – which can be employment so by being employed this criterion is fulfilled.
2. The home office is be regularly and exclusively used by you to do your job – once you have finished a day’s work, for example, the area cannot be used as a family room.
3. More than 50% of your work needs to be performed in the home office – in other words you must work from home for at least six months of the tax year.
B) Tax deductions allowed:
If the above criteria have been met, then you may deduct:
1. Rental or bond interest on your home and home repairs,
2. Municipal rates, electricity and water,
3. Wear and tear on office equipment (SARS has differing depreciation rates on computer equipment and office furniture).
4. You will also incur numerous costs in running your home office such as cell phone, bandwidth, equipment repairs, stationery and cleaning. As these are not specified in the Income Tax Act, it is better that you be reimbursed by your employer for these expenses.
In terms of points 1 and 2, as a taxpayer you need to make an apportionment of those costs when claiming them in the income tax return. Typically, this is done on a floor space i.e. square metre basis of the home office in relation to the total area of the home – see the example below.
As noted above, one of the criteria is that you can only claim a home office allowance if more than 50% of your work (at least six months of the tax year) is done in your home office. This is not a problem during lockdown (as the home office is being used 100% of the time) but should you want to continue claiming for a home office after the lockdown, then you will need to spend more than 50% of your working hours in your home office.
This is all best illustrated with an example:
Home Office - Calculation of deductions claimed
Margaret needs to work from home and purchases…
A desk and chair R12 000
Desktop computer and printer R15 000
Margaret’s monthly rates, water, refuse and electricity cost R4 000
Margaret’s monthly rental of her home R20 000
Her monthly data and cell phone cost R1 200
Her Annual tax return
- Wear and tear computer equipment 3 year write off R5 000
- Furniture 10 year write off R1 200
=Total wear and tear deduction C22 R6 200
· Water, rates, refuse and electricity R6 000
· Rental claim R22 500
=Total deductions claimed R34 700
· Company reimburses Margaret for these costs as they are not allowable per the Income Tax Act
· Annual depreciation computer = R15 000/3 = R5 000
· Annual depreciation furniture = R12 000/10 = R1 200
· Size of Margaret’s house 400 square metres
· Size of her home office 50 square metres
· Claim is (25/200) 12,5% of allowable costs
· Annual municipal charge R48 000 for R4 000 monthly
· Claim is 48 000 x 12.5% = R6 000
· Rental claim = annual rental x 12.5% R22 500 R180 000 x 12.5%
By this example you can see that you could be compensated for equipping a home office, and this way both the employee and employer benefit.
As an employee make sure you get a letter from your employer to confirm that you are working from home, retain invoices and statements of these expenses, and keep a running spreadsheet of days worked at home for the tax year.
As an employer speak to your accountant when setting this up. SARS’ requirements are stringent and you don’t want your staff to be denied the deduction.
The risk will lie in the CGT!
Claiming for a home office as above may well have an adverse impact on the amount of Capital Gains Tax you have to pay when you eventually sell your home. This can become a complicated issue and calculation so it is essential to get professional advice on this aspect!
BI Prime will gladly assist you with your tax returns this financial year as well as the future. Contact us today to get started.