The South African Revenue Service recently published an update on claiming home office expenses, warning taxpayers against applying the tax deduction without considering the full implications.
Its advice on the issue comes after a full tax year where many employees were required to work from home.
SARS Commissioner Edward Kieswetter said that there are long-term implications of defining an area in your primary residence as a home office for tax purposes.
“It may be more prudent to wait and establish a more sustainable rhythm before making the decision,” Kieswetter said.
He also warned that SARS flagged many tax returns that included home office claims for verification.
“We really want to caution taxpayers to correctly and truthfully complete their returns, as [dishonest] behaviour will be detected,” said Kieswetter.
In its update regarding home office expenses, SARS warned that defining part of a primary residence as a home office will most likely negatively impact capital gains tax calculations in the future.
Primary residences enjoy a R2 million exemption from capital gains tax, known as the primary residence exclusion.
However, the home office area is excluded from the R2 million exemption on a pro-rated basis.
SARS said that taxpayers should weigh the potential costs of deducting home office expenses against the benefits.
“Taxpayers may also find that working from home led to savings on expenses they would otherwise have incurred, like transport, wear and tear on vehicles and so forth,” SARS stated.
“Taken together with the loss of part of the of the capital gains exclusion, these savings may outweigh the benefit of a claim for home office expenses,” it said.
SARS also warned that there was a high likelihood that a taxpayer who claimed home office expenses for the first time would be selected for verification or audit.
To find out if SARS is trying to scare taxpayers away from claiming the home office benefit, MyBroadband spoke to Andreana Osche of Anco Integrated Financial Services.
Osche said it was fair to make the taxpayer aware of the trade-offs of claiming home office expenses.
She also agreed with SARS that it is necessary to calculate whether the potential increase in capital gains tax is worth it.
However, Osche said that for most people, the impact to the capital gains on their primary residence from claiming home office expenses would be negligible.
Claiming home office expenses is not trivial, though, and does require diligence on the taxpayer’s part.
First, you must accurately measure your work area, then calculate the ratio of your work area compared to the total area of your home.
You can then deduct several expenses from your tax according to that ratio. Some examples of expenses you can deduct are:
- Bond interest and insurance, or rentals
- Utilities — electricity and water
Osche said that the following costs might be deducted according to the percentages allowed by SARS, depending on whether the expense was incurred for business purposes:
- Depreciation — the rate is determined by SARS, then claim 100% of that
- Stationery — 100%
- Repairs and maintenance, study assets — 100%
- Assistant’s fees
- Wi-Fi and computer expenses — usually 75% to 100%
- Cellphone and telephone — usually 75% – 100%
Taxpayers must compile accurate schedules and provide all slips and vouchers if audited.
Importantly, Osche said that if the taxpayer is an employee, they must have a letter from their employer confirming that they will be required to work from home.
For your work area to qualify for home office deductions, the following should be noted:
- An office, appropriately equipped, must have been set up at the place of primary residence.
- You must have used the office regularly and exclusively for work purposes.
- You must have used the office for more than 50% of your duties or, if you earn more than 50% of your remuneration from commission or other variable payments based on work performance, more than 50% of your duties must have been performed away from the employer’s office.
- Any home office expenses must be linked to employment use and must be verifiable.
- You must claim home office expenses against source code 4028 in the income tax return.