IN28: Home office expense

On 4 March 2022 SARS released an updated Interpretation Note 28 as guidance on what SARS will accept as allowable home office expenditure and how the deduction must be determined. 

Before claiming any tax deduction, employees must ensure that they meet the necessary requirements and that the amount that they wish to deduct is determined correctly.  Generally, the deductibility of expenses relating to a home office must be determined with reference to section 11 of the Income Tax Act, 1962 (“the ITA”), read with section 23(b) and 23(m).

Where a taxpayer is in receipt of remuneration from employment or the holder of an office and where more than 50% of that income is not mainly due to sales-based commissions, the allowable expenditure is limited.

The updated version of Interpretation Note 28 provides additional detail in respect of a number of aspects relating to home-office expenses, such as how deductions would have to be treated where spouses share a home office, how interest on a bond should be treated etc. These aspects are discussed in more detail below, based on how the elaborated explanations provided for in the updated version of Interpretation Note 28.

Do your premises qualify as a home office (as approved by SARS)?

In order for a part of your dwelling to be regarded as a “home office”, the space used must be specifically equipped to allow you to carry on your employment. The space must have the right tools and instruments allowing you to perform your duties (e.g. a workstation, chair, computer and communication equipment).

In addition, the area must be regularly and exclusively used to carry on your employment. The part used for trade may not be used for any purpose other than the taxpayer’s trade. If you only use your “home office” occasionally, i.e. once a week or for activities of a private nature, this would not be regarded as regular use of the premise and it would therefore not be regarded as a home office.

If you share the space and equipment to perform duties with a spouse, it will disqualify you from being able to claim any home office expenditure, as the space and equipment would not be used exclusively by one particular taxpayer. The updated version of Interpretation Note 28 however provides that , should you both perform your duties in the separate room which has been divided into two distinct parts and each one uses only the separate part of the room allocated to them and specifically equipped for their respective trades, it would be easier to provide evidence supporting the position that the requirements of section 23(b) has been met

To satisfy the “mainly” requirement, the employee must spend more than 50% of his or her working time during the particular year of assessment rendering employment services at the home office.

This could be substantiated by way of a copy of your company’s policy document or your employment agreement or confirmation from your employer that you are permitted under the employment agreement to render employment services away from the employer’s premises and the number of days you were present at the employer’s premises.

SARS accepts that the correct apportionment method to calculate the proportion of expenditure attributable to a part of a premises occupied for purposes of trade, is apportionment based on floor area of the premises. The entire area of all of the buildings on the property are used to calculate the portion of expenditure attributable to the home office and not only the area of the main dwelling.

Examples of expenditure that will qualify:

• Rental expenditure;
• Repairs that relates to the part of the property used as a home office;
• Wear and tear of any non-permanent assets acquired (desk, computer, printer, modem, phone etc.);
• Rates and taxes including other municipal charges;
• Electricity;
• Home owners insurance to the extent that is insures against damage to the premises
• Costs in relation to security of the premises (other than capital costs); and
• Cleaning costs.

Expenditure that will not be allowed (SARS is of the view that such expenditure is not incurred in connection with the premises; it therefore falls outside the scope of qualifying expenses):

• Interest on a bond. Interest incurred on most loans used to acquire a premise will meet the requirements for deduction under section 24J and will therefore be deductible under section 24J. For fixed salary taxpayers this deduction is however prohibited under section 11(a) read with section 23(b). Interest on a bond will only be claimable if the taxpayer derive remuneration mainly in the form of commission and the prohibitions of section 23(b) and 23(m) do not apply.
• Bond and household insurance costs;
• Solar systems, generators and inverters (if they are integrated into the permanent structure of the premises);
• Phone and data costs (including monthly charges);
• Stationery;
• Refreshments;
• Fibre installation and monthly subscription fees (ownership requirement) and
• Levies (relate to common property and not own section).

Capital gains tax adjustment

Should you be eligible to claim home office expenditure in relation to your primary residence, you should be mindful that this will have an effect on your capital gains tax calculation at the time of the disposal of your property.  Where you dispose of your primary residence, there is an annual exclusion of R2 million that will reduce any capital gain, at the time of disposal.  Should you have used a portion of your property as a home office, you will need to apportion the gain, based on the time that the property was used as a home office and the area of the property.  This portion of a gain applicable to your home office will not qualify for the primary residence deduction as it was used for purposes of trade.

The updated version of Interpretation Note 28 clarifies that should you work from home and do not claim any deduction, the use will potentially not be regarded as used mainly for purposes of trade and therefore not regarded as tainted use when calculating the apportionment of the capital gain or loss on disposal between trade and non-trade use.

Supporting documentation

The following documentation, which is now specifically listed by the updated version of Interpretation Note 28, would typically be required to support a claim in circumstances where the taxpayer’s home office is a separate room:

• Schedule setting out details of each amount claimed, as well as the apportionment calculations.
• A floor plan of the premise clearly showing the home office and including the actual dimensions of each part. If other buildings are required to be included in the apportionment calculations, a plan showing all the buildings on the property, including the actual dimensions of each.
• Photographs of the home office showing the dedicated space, specifically equipped.
• Documentation supporting the incurral of each expense claimed and proof of payment, for example:
  • Municipal accounts for rates and taxes, electricity and other municipal services, or an electricity bill from a managing agent, or a prepaid electricity voucher and proof of payment.
  • Bond statement reflecting the interest portion of the mortgage bond repayment.
  • A copy of the insurance policy and proof of payment of insurance premiums.
  • A schedule of rent paid, copy of lease agreement and proof of payment.
  • Schedule of repairs, including invoices and proof of payments.
  • Proof of acquisition or of the lease of assets used for purpose of trade for which wear-and-tear is claimed and proof of payment.
  • Schedule of dates detailing when the employee worked from home during the year of assessment along with a calculation proving that the employee worked mainly from the home office during the year of assessment.
  • A letter from the employer, on the employer’s letterhead, confirming that the employee was permitted to work from home, including the periods that the employee was permitted to work from home and, if available, those periods that the employee did not report to the office.

These records must be retained for a period of five years from the date upon which the tax return was submitted to SARS and must be produced should the taxpayer be selected for inspection, verification or audit.

A copy of the updated version of Interpretation Note 28 can be accessed here.

28/03/2022