Due to lockdown, many taxpayers will be allowed to deduct home office expenditure in the 2021 tax year.
Previously a taxpayer may have worked in a home office after hours, but seldom would they have reached the 50% requirement. Due to lockdown, this picture has changed.
Let's take a closer look at the requirements that a taxpayer needs to meet to save some tax in the 2021 tax year.Requirement 1 - Exclusive use
You need to have a room that is exclusively used for purposes of trade. In other words, you will not qualify for any deduction if you work from the dining room table or a desk in your bedroom. You will only qualify if you have an office that you only use for performing your work and nothing else. The office also needs to be set up accordingly, in most cases this will mean a desk and chair (plus any other equipment you need to perform your work).Requirement 2 - 50% Rule
You need to work in the exclusive office at least 50% of the time. In other words, if we look at the 2021 tax year, you would have had to work for more than 50% of the time in your home office in the period 1 March 2020 - 28 February 2021.
Requirement 3 - Letter from employer
You need a letter from your employer that you are allowed to work from home.
What expense may a taxpayer deduct?
Adjusted from SARS' website:
Typically, the type of home office expenditure referred to in section 23(b) of the income tax act (subject to apportionment), namely:
- Rent of the premises;
- The interest portion of your bond
- cost of repairs to the premises; and
- expenses in connection with the premises.
In addition to these expenses, other typical home office expenditure may include –
- Rates and taxes;
- Office equipment; and
The taxpayer has to apportion these expenses based on the size of their home office. For example, if your home office is 10 square meters and your home is 100 square meters, you can deduct 10% (10 / 100) of:
- Rent of the premises
- The interest portion of your bond
- cost of repairs to the premises
- expenses in connection with the premises
- Rates and taxes
Here is the official formula according to SARS' website:
Should you qualify for a deduction in respect of home office expenses, the amount must be calculated on the following basis: A / B x total costs, where:
- A = the area in m² of the area specifically equipped and used regularly and exclusively for trade e.g. employment
- B = the total area in m² of the residence (including any outbuildings and the area used for trade in the residence)
- Total costs = the costs incurred in the acquisition and upkeep of the property (excluding expenses of a capital nature)*
*Note that only expenses relating to the premises must be apportioned based on floor area (such as example rent, interest on bond, rates and taxes, cleaning, etc.) Expenses that do not relate to the premises (such as wear and tear on equipment and furniture) do not need to be apportioned based on floor area.Caveat
Important to note that once you have claimed home office expenses as a tax deduction you will need to adjust your primary residence exclusion when you sell your property.
When you sell your primary residence (the home you live in ), SARS grants you an exclusion of R2 million (as at the time of writing). When you use a portion of your home as an office, the full area and period you live in the home were not only for personal purposes but now also for business use. Thus you will need to apportion the exclusion based on this. Essentially it will entail an apportionment based on the time and portion of the home that you used as an office.
Author: Chris Herbst - GTP(SA)™