What you need to know: Tax deductions for home office expenses and your 2021 tax return has been saved
What you need to know: Tax deductions for home office expenses and your 2021 tax return
Published: 1 September 2021
Due to the COVID-19 pandemic, you, as an employee, may have had to work from home during the 2021 tax year and you may have incurred additional expenses to run your home office.
Given that the 2021 tax filing season is now open, you need to assess whether you are permitted to claim certain of these expenses as a tax deduction in your 2021 tax return. It is important to note that the fact that you worked from home for at least six months during the 2021 tax year does not necessarily mean that you will be entitled to claim a tax deduction for the home office expenses that you have incurred. The Income Tax Act, 58 of 1962 (Income Tax Act), sets out rigid requirements that must be met before employees can claim a tax deduction for home office expenses, and there will be no relaxation of these tax rules because of COVID-19. The provisions in the Income Tax Act that allow employees to claim a tax deduction for home office expenses are not new in our law, nor are they COVID-19 tax relief measures. Many employees have simply not previously made use of these provisions as they mainly worked from their employers’ premises.
In this article, we provide a brief overview of the requirements that need to be met by salaried employees (i.e. employees other than commission earners and independent contractors) to qualify for a tax deduction for home office expenses, the types of expenses that can be deducted, the manner in which to disclose the tax deduction on your income tax return and the types of supporting documents that the South African Revenue Service (SARS) may request to substantiate the deduction.
What requirements must salaried employees satisfy to qualify for a tax deduction?
If you are a salaried employee and your employer has permitted you to work from home and you have set aside a room or part of your home to be occupied for purposes of carrying out your employment (i.e. for purposes of carrying out your “trade”), you may be allowed to deduct certain home office expenses for tax purposes.
A room or part of your home or dwelling will be considered occupied for the purposes of your employment if:
- such room or part is specifically equipped (i.e. fitted with all the necessary equipment/tools) for purposes of your employment; and
- such room or part is regularly (as opposed to occasionally) and exclusively used for purposes of your employment.
The recent draft interpretation note issued by SARS, which deals with the tax deduction of home office expenses incurred by persons in employment or persons holding an office (Draft Interpretation Note 28 [Issue 3]) (Interpretation Note 28), provides that you will not be permitted to claim the deduction if you use your home office for any purpose other than your employment. For example:
- if you and another person (e.g. your spouse) use a room in your home as your respective home office, neither you nor your spouse will be permitted to claim the deduction, as the room is not specifically equipped solely for your trade or for your spouse’s trade and the room is not exclusively occupied for purposes of your employment or for purposes of your spouse’s employment;
- if your home office is used as an office by day and a television room by night, you will not be permitted to claim the tax deduction, as your home office is not exclusively used for purposes of your employment.
Interpretation Note 28 also provides that SARS is of the view that you will have difficulty in discharging the burden of proving that a part of your home was used exclusively for purposes of your employment if that part does not constitute a separate room on the premises.
In addition, if you are a salaried employee, you will only be eligible for a tax deduction in respect of your home office expenses if:
- the income from your employment or office is derived mainly (i.e. more than 50%) from commission or other variable payments and you do not perform your duties mainly (i.e. more than 50%) in an office provided by your employer; or
- you mainly (i.e. more than 50%) perform your duties in your home office. Under this requirement, as a non-commission earner, you will need to assess how often you work from your home office as opposed to your employer’s office or from a client’s premises. If you work mainly on the road or from a client’s premises it cannot be said that you worked mainly from home.
What expenses can you claim as a tax deduction?
Importantly, not all the home offices expenses that you have incurred can be claimed as a tax deduction. If you meet the above qualifying criteria, then you may only claim the following expenses as a tax deduction:
- rent of the premises
- cost of repairs to premises
- any other expenses in connection with the premises. These costs include expenses such as:
o interest on a bond
o rates and taxes
o cleaning costs (e.g. domestic worker’s salary)
o security costs.
These expenses cannot be claimed in full as a tax deduction and you will need to apportion the expenses, based on the floor area of your premises, so that only the portion of the expenses that relate to the home office can be claimed as a tax deduction (unless the expense is specifically incurred only for your home office).
The following expenses are typically not allowed as a tax deduction as they do not comprise expenses incurred “in connection with the premises”:
- phone costs (including monthly subscription) and internet expenses
- stationery and printing expenses
- cost of insurance
- bond repayments.
However, if you conduct a trade other than employment or you are mainly a commission earner, then certain of the home office expenses which are not ordinarily allowed as a tax deduction to salaried employees (e.g., phone costs, stationery, printing, etc.) may be claimed as a tax deduction, provided that these expenses have been incurred in the production of your commission (or other) income and for the purposes of your trade.
Other amounts that may be claimed as a tax deduction, by both salaried employees and persons who are mainly commission earners, include wear and tear on furniture, fittings and equipment used in your home office for business purposes (i.e., you are allowed to claim a wear and tear allowance on assets used for purposes of your employment irrespective of whether or not you qualify for the home office tax deduction). The cost of these assets may be written off over their anticipated useful life for tax purposes.
How to disclose the tax deduction on your income tax return
If you are satisfied that you meet the above requirements, the next step is to disclose your qualifying expenses in the correct fields on your 2021 income tax return (ITR12).
Completion of wizard
Under the “Standard Questions” heading on the wizard, you will need to tick “Y” to the question “Did you receive any other income (excluding amounts received/accrued as a beneficiary of a trust(s), or deemed to have accrued in terms of s7) and/or incur any other allowable expenses not addressed above?”
In addition, you will need to tick “Y” to the question “Did you incur any expenditure that you wish to claim as a deduction that was not addressed by the previous questions?” (this is located under the “Comprehensive Questions” heading). If you respond “Yes”, the section for “Other Deductions” will be added to your ITR12.
Completion of ITR12
Your qualifying home office expenses should be disclosed under source code 4028, “Home Office Expenses” in the “Other Deduction” section on your IRT12.
The wear and tear allowance (if any) should be disclosed under source code 4027, “Depreciation” in the “Other Deduction” section on your IRT12.
Examples of supporting documents which SARS may request from you
The onus of proving that the expenses you have incurred qualify for a tax deduction rests with you as the taxpayer, and not with SARS.
Should you claim a tax deduction for home office expenses on your IRT12, it is likely that SARS will verify this and will request supporting documents from you. Such supporting documents can include, for example:
- a letter from your employer stating that you were permitted to work from home;
- proof that more than 50% of your duties/work was performed in your home office. In this regard, you will need to provide records of the dates you worked from home and from your employer’s office during the tax year;
- a copy of your home’s floor plan showing that the space is a dedicated home office;
- photographs showing the space that is specifically equipped for work;
- the underlying apportionment calculation showing how you calculated the amount reflected on the tax return; and
- documentation to prove the actual expenses incurred (e.g., lease agreement, bond statements, bills from the municipality, etc.).
The above-mentioned list is by no means exhaustive and SARS could request further information. SARS may also conduct a home visit should further proof be required that your home office meets the above requirements.
- Generally, relatively few employees who earn a salary income only, or no/limited commission income, would qualify for a tax deduction for home office expenses. You should therefore only claim such a tax deduction if you are able to demonstrate to SARS that you have met the above requirements.
- Retain all your supporting documents for a period of at least five tax years, unless the tax years have not yet prescribed (in which case you will need to maintain these for longer until the relevant tax years have prescribed).
- Since you have likely been carrying on your employment from home, adverse capital gains tax implications may arise when you sell your home (whether or not you claimed a tax deduction for home office expenses). Any capital gain derived upon the sale of your property will be apportioned with reference to the extent to which your property was used for business (i.e., employment) versus domestic purposes. The “primary residence” exclusion for natural persons (currently R2 million) will apply to the portion of your home that relates to domestic use.
- As many employers start to adopt hybrid working arrangements, many employees are likely to continue to work from home, at least partially, in future years. It is therefore important that employees collate and retain all supporting documents for home office expenses incurred in each tax year should they wish to claim a tax deduction for these expenses.