With the massive and unexpected impact of the global Covid-19 pandemic, both on health and the economic survival of many people in South Africa and the rest of the world, the government has had to take some severe and unprecedented but essential measures to try to limit the death toll from the virus.
These include the Lockdowns that have forced many businesses to either close down for an indefinite period of time or, when the nature of the business made this feasible, to allow the owners or staff to work from home, for example, when they were office workers who could do their work at home.
But what are the tax implications for those people who work from home?
While business expenses are generally deductible for income tax purposes, a special rule applies when a person works from home. It is provided by s 23(b) of the Income Tax Act 58 of 1962 (read with s 23(m) of that Act).
This provision envisages that a person occupies part of their dwelling-house or domestic premises for purposes of trade. Then, although their domestic or private expenses such as the rent of or cost of repairs of, or expenses in connection with, these premises are normally prohibited as a deduction, they will be able to apportion the expenses and claim a portion as a deduction.
The part used for purposes of trade must be specifically equipped for those purposes and must be regularly and exclusively used for those purposes. Under this rule, for example, a person may claim part of their domestic expenses relating to a cottage or storage space that they work in, such as a portion of the interest on a bond used to finance the acquisition or improvement of the property and of the costs of water, municipal services and power.
Other expenses that may be deducted are those incurred directly in connection with their work activities, such as printing and stationery, depreciation of assets such as their computer or printer used just for their work, repairs to their office equipment, the costs of employing people to assist them in their work and even a portion of the wages of domestic staff that clean their workplace. A reasonable portion of these expenses may be deducted for tax purposes. What is reasonable would depend upon the facts and the circumstances. For example, with wages of domestic staff it may depend upon their time spent on the workplace as a percentage of the time spent on the entire house, while with municipal rates it may depend upon the size of the workplace as a percentage of the size of the whole house on which the rates are payable.
A good example of the type of person who could claim these deductions is a professional person such as an accountant who sets aside part of their home for an office where they meet clients and do their accounting work, as long as the part of the property used for their work is used only for work and not for other purposes.
To qualify for the deduction the person concerned must be self-employed. A salaried employee of a company or anyone else that carries on the trade will not qualify. The reason is that an employee or office-holder can claim the deduction only if they derive their income mainly from commission or other variable payments that are based on their work performance and their duties are not performed mainly on the employer’s premises.
It may also happen that a husband and wife both work from home but carry on businesses independently from one another or are employed by different employers. If they can identify the parts used by each of them and those parts meet the requirements set out above, they will each be entitled to claim the deductions for the part used by them as described above – at least in theory.
The important point to emphasise for anyone wanting to claim these deductions is that they must be able to prove what expenses were incurred, why they were incurred and that the basis of the apportionment of the expenses between them can be justified.
A person who qualifies for a deduction for their expenses on their home office should claim the deduction in the ‘Other Deduction’ part of their income tax return under the source code 4028 (Home Office Expenses). The other tax to consider is Capital Gains Tax (CGT), that may be payable when a person disposes of their home or so-called primary residence. Two of the main issues that a taxpayer should be aware of are highlighted below.
The first one is what happens when a person sells their home and they have used part of it for business or work. The general principle is that when a person disposes of their primary residence for an amount that is not more than R2 million, that person is not liable for CGT on the disposal (sale) thereof. If a person gets more than R2 million for the home, the first R2 million of any capital gain or loss on the sale is ignored for CGT purposes. There are lots of ifs and buts, but the general principle is that if a person sells their home for a profit, they pay CGT only on the amount by which the capital gain on the disposal exceeds R2 million.
But if a person used their residence or part of it for working purposes during any of the periods of their occupation of the property since CGT came into force on 1 October 2001, they must calculate an apportionment to work out how much of their usage may be attributed to their working or trading activities. In doing so they would have to regard the size of the whole property and what portion of it they used for trade purposes as well as the portion of the period of their ownership of the property in which they used it for these purposes.
The part of the capital gain that is regarded as attributable to working purposes does not qualify for the R2 million ‘exemption’ from CGT, so that only the part that is attributable to residential use will qualify for this concession.
Example of CGT concession for a person’s primary residence
Say a person bought a house for R3 million (after CGT was introduced on 1 October 2001) and later spent R600 000 on improvements to the property and eventually sold it for R7 million. If the person used 10% of the house for working purposes, the capital gain would be calculated as follows:
In addition, the 10% of the capital gain attributable to working use, that is R340 000 will be subject to CGT.
If you want to read more, the SARS website has a page for home office expenses. They have uploaded a webinar and a presentation to explain this topic in more detail.