As more South Africans work from home during the coronavirus pandemic, the question arises of whether they qualify for tax deductions.
The short answer is “it depends”.
Jean du Toit, tax attorney at Tax Consulting SA, told Fin24 that a home office will qualify for certain tax deductions if it is specifically equipped for purposes of the taxpayer’s “trade” – in other words, how they earn an income – and if it is regularly and exclusively used for that purpose.
Generally speaking, he says, the Income Tax Act permits deductions for expenditure incurred “in the production of income” – that is, expenses incurred in the course of earning a living.
The Act, however, sets out specifically when such deductions are not allowed.
If a person earns their income from employment, rather than being self-employed, they are not allowed any tax deductions unless they earn that income mainly from commission or other “variable” remuneration, and their duties are mainly performed outside the employer’s office.
If their income is not mainly from commission or variable payments, the duties of the work they do must be performed mainly in the qualifying part of a home – in other words, in an area of the home set aside exclusively for doing that work and on a regular basis.
“What is important is the word ‘mainly’, which means more than 50%. So, if you are an employee, then you can only qualify if you perform your employment duties for more than half the time at your home office,” explains Du Toit.
“Given that the lockdown will not extend beyond six months (or so we think), it cannot be said that an ordinary employee performed their duties ‘mainly’ at their homes during the year of (tax) assessment.”
Therefore, he believes these tax deductions for working from home will likely not be allowed.
Making the most of your home office
The trend towards working from home and at home is expected to gain ground in the wake of the coronavirus crisis, and will make the “home office” a feature of many more homes big and small, according to Gerhard Kotzé, managing director of the RealNet estate agency group.
“Increasing urbanisation and traffic congestion has already been driving the so-called Fourth Industrial Revolution, with rising numbers of consumers and employees using the internet to work and buy online and so avoid the stress, risks and loss of time and productivity involved in travelling to offices and shopping centres,” comments Kotzé.
“But now we believe remote working will very rapidly become the norm for huge numbers of salaried as well as self-employed people, who have learnt just how much it is possible to achieve with a smartphone, laptop and high-speed internet connection.”
However, if you do have a home office it needs to be set up correctly to get the most out of it in terms of both productivity and tax savings.
“Having a dedicated home office may allow you to claim a tax deduction from SARS if you are a full-time employee who spends more than half your working hours in your home office, a commission-earner whose employer does not provide you with an office, or a small business owner or freelancer who always works from home, he says.
“To claim a deduction, you will need to have a specific part of your home which is used exclusively as your office and then calculate the square meterage of that space as a percentage of the total area of your home,” says Kotzé.
“You need to check with your accountant or tax-practitioner for specifics, but generally, salaried employees are allowed to deduct from their income this percentage of the total cost of anything relating to the whole property, including rent or interest on a bond; any repairs to the premises; cleaning and maintenance costs; rates and taxes and wear and tear.”
Commission-earners can also deduct the same percentage of all their related business expenses, including telephone charges, stationery purchases, repairs to office equipment and courier services, for example, while sole proprietors and freelancers can deduct all their business expenses.
“If you have a home-based business that is registered for VAT, you can also claim VAT input credits on the costs of maintaining the premises in which that business is housed,” says Kotzé.
“But you should be careful not to claim a VAT input credit on the cost of any additions or alterations you make to your property to accommodate a home office or home business. This is because, if you claim a credit for building work done to add an office, for example, or to convert the outbuildings, SARS will expect you to include VAT in the price of the whole property when the time comes to sell it.”
That means that, unless you could then sell your property for considerably more than the market average in your area, you would probably lose out on 15% of your sale proceeds, which would be going straight to SARS – and would likely be a much bigger amount than your original VAT credit, he adds.
Dale Cridlan, director of Norton Rose Fulbright Tax Services, says while government has already proposed exceptional tax measures to assist small to medium sized businesses (SMEs), it has also been announced that further tax relief measures will be considered with the aim of assisting taxpayers during the Covid-19 pandemic.