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Home office expenses


2014-05-27

SARSdeductionshomeofficecommission

Seeing that SARS has been looking with new eyes at Home office expenses, the following notes from TaxTips SA regarding who may and who may not claim for a home office and what deductions are allowed, offer welcome insight:
 

Deductions MUST meet the following requirements:

  • For a home office deduction to be deductible, it must meet the requirements of Sections 11, 23(b) and 23(m)
  • NOT be of a capital nature (e.g. maintenance, rates and taxes and wear and tear on office equipment qualify);
  • Be directly related (and limited) to the part of house used for the purposes of trade (i.e. the office part only);
  • This part of the house must be used regularly and exclusively for the purposes of the trade. This means that setting a desk up in the corner of your dining room, and calling it your "home office" during the day, won't cut it!
  • If your trade is a form of employment, the income you get from it must be mainly (i.e. 50% +) commission and your employer doesn't provide you with an office to carry out your duties (hence, your home office).
  • If your trade is a form of employment and it's not mainly commission, then the duties of the employee must be mainly performed in such home study, meaning your employer doesn't provide you with an office to carry out your duties.

Caution! Employees who don't earn commission, but spend most of their time on the road visiting clients are performing their duties mainly at their clients' premises – so they don't qualify for a deduction under Section 23(b).

 

Clarifying Section 23(m)

This Section in the Income Tax Act allows limitations on the deductions that employees and office holders can claim for home office expenses. It doesn't apply to commission-earners, whose income is mostly (i.e. 50%+) earned from commission.

 

Example 1: Commission earner

Gavin is an employee for a medical solutions company. He gets a commission income of R50 000 annually, an annual salary of R20 000 and a travel allowance of R3 000 allowing him to make sales visits. Since his employer doesn't give him an office to work out of, Gavin is forced to set up a small home office, from the study in his home. He uses this home office every day, exclusively to carry out his duties.

Of the total 200m² of his home, the office constitutes 20m² – meaning that the office is about 10% of the total area of the house. Gavin pays interest of R25 000 per year on his bond. And his rates and taxes cost him R2 500 per year too.

Gavin will use this information when he calculates his home office deductions. When he set up his home office, Gavin bought a PC for R12 000, a desk for R2 000 and a chair for R800. His commission-work office expenses (for his cellphone and stationery, etc.) amounts to R9 000. Gavin contributes R5 000 each year to a pension fund.

How will Gavin be taxed?

As more than 50% of his income is commission, Section 23(m) won't apply to Gavin. Due to the fact that he uses his home office regularly and exclusively for the purposes of earning commission income, the home office deduction requirements are met.

Let's take a closer look at exactly what he can deduct:

  • The business portion of cell phone and stationery expenses (if not reimbursed by the employer);
  • Wear and tear allowance for computers and other equipment as well office furniture;
  • 10% of the interest on the bond (since her office is 10% of the area of the house);
  • Levies and Rates and taxes of R250 (again, this is calculated based on the office being 10% of the area of the house).
  • Security;
  • Cleaning or office maintenance costs.

 

Example 2: Home office deduction for non-commission earners

Sandra is an employee for an IT solutions company. She gets a yearly salary of R50 000 and an annual commission of R20 000. She also gets a travel allowance of R3 000 allowing her to make sales visits. Since Sandra's employer doesn't give her an office to work out of, she has set up a small home office that she uses every day.

Of the total 200m² of her home, the office constitutes 20m² – meaning that the office is about 10% of the total area of the house. Sandra pays interest of R25 000 per year on her bond. And her rates and taxes cost her R2 500 per year too.

Sandra will use this information when she calculates her home office deductions. When she set up her home office, Sandra bought a PC for R12 000, a desk for R2 000 and a chair for R800. Her commission-work office expenses (for her cell phone and stationery, etc.) amounts to R9 000. Sandra contributes R5 000 each year to a pension fund.

How will Sandra be taxed?

Since more than 50% of her income is a fixed salary, Sandra is restricted by Section 23(m). So even though she meets the requirements of Section 23(b) (i.e. that she maintains a home office that's used regularly and exclusively for the purposes of earning income), she can't claim the deductions that Gavin (above) can claim for his cell phone and stationery.

She will only be able to claim the following deductions:

  • The business portion of cell phone and stationery expenses (if not reimbursed by the employer);
  • Wear and tear allowance for computers and other equipment as well office furniture;
  • 10% of the interest on the bond (since her office is 10% of the area of the house);
  • Levies and Rates and taxes of R250 (again, this is calculated based on the office being 10% of the area of the house).
  • Security;
  • Cleaning or office maintenance costs.
  • What SARS has requested from our clients for the 2013 tax season to support these deductions.
  • Photos of the home office.
  • Actual square meters of the house and the office.
  • House plans to confirm the square meters.
  • SARS can also arrange a visit at the client's house to make sure that a dedicated space has been allocated for the home office.

 

I believe the above TIPS will assist with a smoother happier 2014 tax season!

Danita de Wet

Taxmanager, TaxTips SA
Abacus Payroll Agent, East Rand Area

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