SARS clarifies the deduction of home office expenses

On 15 March 2011, SARS published an update to Interpretation Note 28, dealing with the deduction of home office expenses. Since there’s been much confusion over this, we thought it a good idea to highlight the issue and explain the rules carefully.

If you work from home and have a home office, (or know someone who does), then this interpretation note is especially important. Commission earners, too, should be aware of these rules. Before we discuss the changes, let’s re-cap the basics.

Deductions MUST meet these requirements

For a home office deduction to be deductible, it must meet the requirements of Sections 11, 23(b) and 23(m).

We’ll discuss Section23(m) below, as it’s a little more complex, but let’s look at the other  requirements briefly. In a nutshell, the deduction must:

  • NOT be of a capital nature (e.g. maintenance, rates and taxes and wear and tear on office equipment qualify);
  • Be directly related (and limited) to the part of house used for the purposes of trade (i.e. the office part only);
  • This part of the house must be used regularly and exclusively for the purposes of the trade. This means that setting a desk up in the corner of your dining room, and calling it your “home office” during the day, won’t cut it!
  • If your trade is a form of employment, the income you get from it must be mainly (i.e. 50% +) commission and your employer doesn’t provide you with an office to carry out your duties (hence, your home office).
  • If your trade is a form of employment and it’s not mainly commission, then the duties of the employee must be mainly performed in such home study, meaning your employer doesn’t provide you with an office to carry out your duties

 

Caution! Employees who don’t earn commission, but spend most of their time on the road visiting clients are performing their duties mainly at their clients’ premises – so they don’t qualify for a deduction under Section 23(b).

Clarifying Section 23(m)

This Section puts limitations on the deductions that employees and office holders can claim for home office expenses. It doesn’t apply to commission-earners, whose income is mostly (i.e. 50%+) earned from commission.

Most recently, SARS updated this Section – specifically addressing cases where certain amounts were received by or accrued to an employee and were included in his taxable income.

Where any portion of that amount is refunded by the employee to the employer, the refunded amount is allowed as a deduction against the employee’s taxable income. The same rule applied to restraint of trade payments, which were previously included in taxable income and are subsequently refunded by the employee.

When the employee’s taxable income doesn’t meet the income tax threshold amount in any particular year of assessment, the deduction for the repaid benefit might create an assessed loss, which may be carried forward to the following tax year.

Example: Commission earner

Gavin is an employee for a medical solutions company. He gets a commission income of R50 000 annually, an annual salary of R20 000 and a travel allowance of R3 000 allowing him to make sales visits. Since his employer doesn’t give him an office to work out of, Gavin is forced to set up a small home office, from the study in his home. He uses this home office every day, exclusively to carry out his duties.

Of the total 200m² of his home, the office constitutes 20m² – meaning that the office is about 10% of the total area of the house. Gavin pays interest of R25 000 per year on his bond. And his rates and taxes cost him R2 500 per year too.

Gavin will use this information when he calculates his home office deductions. When he set up his home office, Gavin bought a PC for R12 000, a desk for R2 000 and a chair for R800. His commission-work office expenses (for his cellphone and stationery, etc) amounts to R9 000. Gavin contributes R5 000 each year to a pension fund.

 

How will Gavin be taxed?

Since more than 50% of his income is commission, Section 23(m) won’t apply to Gavin. And because he uses his home office regularly and exclusively for the purposes of earning income, he meets the home office deduction requirements. Let’s take a closer look at exactly what he can deduct:

  • His pension fund contributions;
  • The cellphone and stationery expenses;
  • Wear and tear allowance, for the computer, desk and chair in his office;
  • Travel deduction;
  • 10% of the interest on the bond (since his office is 10% of the area of the house); and
  • Rates and taxes of R250 (again, this is calculated based on the office being 10% of the area of the house).

 

Example: Home office deduction for non-commission earners

Sandra is an employee for an IT solutions company. She gets a yearly salary of R50 000 and an annual commission of R20 000. She also gets a travel allowance of R3 000 allowing her to make sales visits. Since Sandra’s employer doesn’t give her an office to work out of, she has set up a small home office that she uses every day.

Of the total 200m² of her home, the office constitutes 20m² – meaning that the office is about 10% of the total area of the house. Sandra pays interest of R25 000 per year on her bond. And her rates and taxes cost her R2 500 per year too.

Sandra will use this information when she calculates her home office deductions. When she set up her home office, Sandra bought a PC for R12 000, a desk for R2 000 and a chair for R800. Her commission-work office expenses (for her cellphone and stationery, etc) amounts to R9 000. Sandra contributes R5 000 each year to a pension fund.

 

How will Sandra be taxed?

Since more than 50% of her income is a fixed salary, Sandra is restricted by Section 23(m). So even though she meets the requirements of Section 23(b) (i.e. that she maintains a home office that’s used regularly and exclusively for the purposes of earning income), she can’t claim the deductions that Gavin (above) can claim for his cellphone and stationery. She will only be able to claim the following deductions:

  • Her pension fund contributions;
  • Wear and tear allowance, for the computer, desk and chair in his office;
  • Travel deduction;
  • 10% of the interest on the bond (since her office is 10% of the area of the house); and
  • Rates and taxes of R250 (again, this is calculated based on the office being 10% of the area of the house).

 

Carrie-Anne Diniz

CentsAccountability

Source: Tax Bulletin – For more tax and vat tips from some of SA’s top tax experts

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