Home Office: You can claim from the taxman
We are all feeling the pinch of paying higher taxes of all sorts this year, from VAT and fuel levies to the new municipal property rates recently announced in many cities. However, self-employed individuals and employees who often work from home may be able to minimize their tax burden and free up some much needed cash-flow.
To minimise or avoid stress and time lost commuting, many individuals are opting to work from home as much as possible. Should certain conditions be met, the South African Revenue Service (SARS) allows for deductions related to home offices, which results in reduced income tax liability.
What is required in order to deduct home office expenditure?
Salary as portion of income.
If more than half of your income comes from a salary, you can qualify only if your employer allows or requires you to work from home and you spend more than half your working hours in your home office.
If most of your income (more than 50%) comes from commission and your employers do not provide you with an office at their expense, you should qualify. And you will definitely qualify if you are a small business owner or a freelancer who always works from home.
Dedicated room.
You must have a specific part of your home that is used exclusively as your office. You need to have a separate space that is permanently set up for work and properly equipped with whatever you need to do your job, such as computers and office furniture. This could be a spare bedroom or other space converted into an office, but it cannot be the dining room table.
Calculating the deduction.
Firstly, we need to look at the taxpayer’s remuneration structure to see whether he/she:
- is a “commission earner” i.e. takes more than 50% of their total remuneration from commission or some other variable form which is based on their work performance or,
- is a normal salaried employee with variable payments/commission making up less than 50% of their total remuneration.
The first group (“commission earners”) can deduct rent, interest on bond, repairs to the premises, rates and taxes, cleaning, wear and tear and all other expenses relating to their house as well as other commission related business expenses (e.g. telephone, stationery, repairs to printer etc.).
The second group (i.e. salaried employees with variable payments/commission making up less than 50% of their total remuneration) can deduct rent, interest on bond, repairs to the premises, rates and taxes, cleaning, wear and tear and all other expenses relating to their house only.
How to calculate the home office deduction
We need to calculate the total square meterage of the home office in relation to the total square meterage of the house, and then convert this to a percentage. We then apply this percentage to the home office expenditure in order to calculate the portion, which is deductible.
Example:
Brenda is a graphic designer who works for Company A. Her remuneration consists of a salary only. Her Company promotes a flexible work culture and therefore allows Brenda to work from home three days per week. Brenda has a separate office at home, fitted with a computer and printer, used exclusively for her graphic design job. The computer and printer were purchased two years ago for R12, 000 and R8, 000 respectively. Her office is 20 square meters, and the floor space of her entire home (including the office) is 200 square meters.
Assume that SARS allows for a 3-year depreciation period for the computer and printer.
During the tax year she incurs the following expenditure:
– R130,000 interest on bond
– R40,000 rates and electricity
– R30,000 paid to cleaner
– R5,000 roof repairs
– R18,000 cell phone expenses
Based on the above, Brenda does qualify for a home office deduction. The square meterage of her home office (20m2) in relation to her house (200m2) is 20/200 which is 10%.
Therefore Brenda’s home office deduction for the tax year =
10% X (R130,000 +R40,000 + R30,000 + R5,000) = R20,500.
Since she is not a commission earner, her cell phone expenses are not deductible
Conclusion
It is important to remember that expenses of a capital nature cannot be claimed in production of income.
Also, should you at a later stage sell the property, take note that the portion used as office (the percentage you claimed as an expense in the past) will not qualify for the Capital Gains Tax Exclusion. By way of explanation: If you claimed a 10% of property size office allowance, and you sell the property at a R2m Gain, 10% of this Gain (R200,000) will not qualify for the current Capital Gains Tax Exclusion
However, if you do spend time working from home it is advisable to discuss the home office deductions with your tax practitioner / accountant. In the current tight economic environment saving on your tax liability may make all the difference.
