Tax deduction for expenditure incurred in a home office

During the Covid-19 pandemic it has become common for employees to work from home. Apart from the health benefits, there are other reasons for the increase in popularity of homeworking, such as more flexibility for employees, less commuting, increasing productivity, and a cost saving for the employer by reducing workspace. Persons working from home may want to claim a deduction for certain expenditure they incurred in their home office.

When determining which expenses relating to a home office can be deducted consideration must be given to the positive and negative tests in the Income Tax Act 58 of 1962 (“Act”).  The positive tests set out in sections 11(a), (d) and (e) deal with deductions that are allowed when determining taxable income. In contrast the negative tests in sections 23(b) and (m) deal with deductions which are not allowed. To deduct home office expenses the taxpayer will need to show that the requirements in section 11 have been met and the prohibitions in section 23(b) and (m) do not apply. The onus of proving that an expense is deductible will be on the taxpayer.

Generally, the requirements of the positive test in section 11 for normal office expenditure would be met.  Deductions available to an employee are however limited by section 23(m). This provision provides that when an employee deducts home office expenses for a “dwelling house or domestic premises”, such employee can only claim the rent, cost of repairs, or expenses in connection with such premises under sections 11(a) and (d) and the wear and tear allowance under section 11(e).

It is not enough for taxpayers to prove that they meet the requirements in section 11 and that they are not excluded by the prohibitions in section 23(m). It is essential that they must also show that the restrictions in section 23(b) will not apply to them.

Section 23(b) requires the part of the home used must be occupied for the purpose of trade. A trade is defined in the Act as including employment and therefore employees may qualify for the deduction. The part of the home that is used for an office will not be considered to be occupied for the purpose of trade unless it is specifically equipped to carry out the trade. In other words, the home office must contain all the equipment that the taxpayer would usually require to conduct the trade. If, for example, the taxpayer was a mechanic who repaired motor vehicles he must have at home all the tools and equipment needed to conduct such repairs. If the taxpayer was an office worker, he would be expected to have a desk, chair, computer, telephone, and other equipment needed to perform office work.

The home office must regularly and exclusively be used for purposes of the taxpayer’s trade. If a taxpayer only uses his home office occasionally, such as once a week or only on weekends, it is unlikely that it could be justified as regular use and would therefore not qualify for a deduction of expenses. In the South African Revenue Service (“SARS”) draft Interpretation Note 28 it states that:

Regarding the requirement of exclusivity, this provision contemplates that the part used for trade may not be used for any purpose other than the taxpayer’s trade. A deduction is not permitted where the taxpayer conducts any activities of a private nature in the part used for trade”.

It is for this reason that SARS submits that a taxpayer may have difficulty in discharging his burden of proof if the home office is not contained in a separate room in the house. Silke on South African Income Tax has a different perspective; the author says that it is, “doubtful whether the word ‘exclusively’ can enjoy any real meaning in the context of premises acknowledged to be domestic”. Silke is also critical of the fact that the qualifying part of the home must be used both ‘exclusively’ and ‘regularly’ as the fiscus does not usually trouble itself with a taxpayer’s level of efficiency or application.

Employees working from home must perform their duties mainly in the part of their home occupied for purposes of trade. This will require an objective factual enquiry to determine whether the employee performed more than 50% of the employment duties in the part of the home occupied for trade. This provision will effectively exclude many salaried employees from claiming a deduction for the part of their home used for work. The SARS Interpretation Note gives the example of a law researcher who works from his home office on Mondays, Wednesdays and Fridays, which translates into 150 days at the home office and 100 days at the employer’s premises. This equates to 60% (i.e., 150/250 x 100) of his time and therefore exceeds the 50% requirement.

Judicial interpretation of section 23(b) is limited with very few reported cases. The case most often referred to is Kommissaris Van Binnelandse Inkomste v Van Der Walt 1986 (4) SA 303 (T), where the taxpayer was a university lecturer who claimed a deduction of expenses in respect of his home study. This case is 35 years old, and because of the subsequent changes to the Act and the introduction of section 23(m), its relevance has become diluted. The Commissioner argued that the taxpayer failed to show that his home study was used exclusively for the purposes of trade because he admitted to using the study while preparing for his Doctorate. To discharge his onus of proving that his expenditure was incurred in the production of income, the lecturer was not required to show that he was under a contractual obligation to maintain a home study. The court held that it was sufficient to show that, to fulfil his obligations under his contract, it was necessary for him to maintain the study and incur the expenses. All that had to be shown was the expenditure was bona fide incurred for the more efficient fulfillment of his obligations under his contract. Although he did not use the study exclusively for his work (as it was also used for his Doctorate), his claim was allowed by the court.

When determining the deduction that may be claimed by the taxpayer both the apportionment ratio and the expenditure that is subject to apportionment must be determined. Apportionment is based on the exact floor area of the entire premises compared to that part attributable to a home office. SARS will not accept an estimate. Permitted expenditure may include, rent, repairs, and expenses in connection with the home office. Any deduction claimed for repairs must relate to the home office and cannot be claimed for any other part of the premises. Expenses in connection with the premises may include interest on the mortgage bond, rates, levies, electricity, and cleaning costs. Expenditure on telephone, stationary, furniture and computers costs are not costs in connection with the premises. These costs are therefore not permitted under section 23(b) but may qualify as a deduction under section 11.

When claiming a deduction for expenses in connection with a home office taxpayers must be mindful that it will affect their primary residence capital gain tax (“CGT”) exclusion. The first R2 million of a capital gain on the disposal of a primary residence is usually disregarded when calculating CGT. If the taxpayer has used the primary residence for carrying on a trade, the R2 million exclusion will be apportioned for the non-residential use and will not apply to that part of the home used for purposes of trade.

Graeme Palmer

[email protected]