Thanks to COVID, many of us are working from home these days. Fortunately, SARS does provide some relief.
You may find the relief does not result in a big refund. For example, based on the below assumptions, your tax bill will only be reduced by R2,460 for the year (R10,000 x 12 x 5% x 41%) or R205 per month:
R10,000 per month in qualifying expenses (see below which expenses can be deducted),
The size of the home office is 4 x 3 metres (12 square metres), making up 5% of your total home (240 square metres).
41% tax bracket.
Requirements in order to claim the home office expense deduction
The taxpayer must spend more than half of their total working hours working from their home office.
The taxpayer must have an area of their home, which is used exclusively for their home office. SARS are being very strict with this requirement and are asking for evidence in the form of photographs and floor plans. The lounge unfortunately does not count. SARS has recently issued a draft interpretation note on the home office deduction which is being challenged by regulatory bodies due to its very narrow interpretation of the ‘exclusive use’ requirement, one issue being that taxpayers who share a space (i.e two people share an office) won’t be able to claim for home office costs. We still don't have a final answer on this and are awaiting a further update from SARS. Please submit as much proof as possible for your claim and be prepared to justify to SARS that you use your office exclusively and regularly for the purposes of your work only.
The office must be specifically equipped for the taxpayer’s trade i.e. it must be specially fitted with the relevant instruments, tools and equipment required for the taxpayer to perform their work.
NB: SARS is auditing most of these deductions, so please do not claim the home office deduction unless you meet all the requirements.
How can home office expenses be calculated?
If you are eligible for a home office expense deduction, the calculation must be done using the following formula: (A / B) x Total Costs, where:
A = the area in square meters (m²) designated and used regularly and exclusively for business purposes (i.e., the qualifying home office space)
B = the entire area in square meters (m²) of the residence, including any outbuildings and the business area within the residence
Total Costs = the closely related expenses associated with the property (such as rent, rates and taxes, repairs, and electricity), excluding any capital expenses.
Supporting documents you will need to provide to support your Home Office Expense Deduction
Schedule of home office expenses.
Supporting invoices and proof of payment for all expenses. These must include at least one utility bill with a physical address (affidavit if the property is not owned by the taxpayer).
Calculation showing how this amount was arrived at and the apportionment.
For wear and tear on office equipment, employment contract or letter from employer, purchase invoice and calculation of claim.
Letter from employer stating that taxpayer can work from home, dates worked at home, the reason for doing so, and whether or not an office is provided at employer's premises.
SARS may also request floor plans of your house, indicating the home office and photos of your home office. If the photos contain a bed or sleeper couch, it may lead SARS to question its 'exclusive' use.
Home Office Expenses that can be deducted
If the taxpayer is earning more than 50% of their total remuneration from commission: rent, repairs to the premises, rates and taxes, electricity, cleaning, wear and tear and all other expenses relating to their house as well as other commission-related business expenses (e.g. internet, telephone, stationery, repairs to printer etc.).
If the taxpayer is earning less than 50% of their total remuneration from commission: rent, repairs to the premises, rates and taxes, electricity, cleaning, wear and tear and all other expenses relating to their house only.
Interest on bond is no longer deductible
In their most recent Interpretation Note, SARS has indicated that starting from the tax year 2023, interest on bond expenses can no longer be considered a home office cost. However, taxpayers may still claim interest on bond expenses for the year 2022 and earlier.
Primary Residence Capital Gains Tax implications of claiming home office expenses
When a part of your home is used as a home office, that part is considered to “taint” the primary residence exclusion for CGT purposes.
Upon the sale of the home, the overall capital gain or loss will need to be apportioned between the tainted and untainted elements. This apportionment is done by taking into consideration the portion of the home being used for business purposes as a home office (based on floor area) and the period that the part was used as a home office. The primary residence exclusion of R2 million can only be set off against the untainted portion of the capital gain or loss. The tainted portion of the capital gain must be fully brought to account.
Understanding Capital Expenses and the Difference Between Repairs and Improvements
Capital expenses refer to costs incurred for acquiring or improving long-term assets, such as property, buildings, or equipment. These expenses typically provide benefits over an extended period and are not immediately deductible as a regular operating expense. However, you may be able to recover a portion of these costs through depreciation or capital cost allowance. The costs of building a home office will not be tax deductible.
See more here - Understanding Capital Expenses and the Difference Between Repairs and Improvements