Income Tax Act, Sections 11 and 23
This article deals with home office usage for business purposes and the associated tax implications.
It has become very common for employers to require or permit employees to work from home. These arrangements are usually temporary in nature, or may have a degree of permanency. Persons in employment or persons holding an office may therefore wish to claim a deduction for certain expenses incurred in relation to a home office.
The most recent amendment to have an effect on the deduction of home office expenditure was the amendment to section 23(m)2 which, subject to specific exceptions, prohibits the deduction of certain expenditure, losses and allowances that relate to employment or the holding of an office.
What does the law say?
Sections 11(a) and 11(d)
- General deductions allowed in determination of taxable income. For the purpose of determining the taxable income derived by any person from carrying on any trade, there shall be allowed as deductions from the income of such person so derived:
(a) expenditure and losses actually incurred in the production of the income, provided such expenditure and losses are not of a capital nature;
(b) – (c) . . . . . .
(d) expenditure actually incurred during the year of assessment on repairs of property occupied for the purpose of trade or in respect of which income is receivable, including any expenditure so incurred on the treatment against attack by beetles of any timber forming part of such property and sums expended for the repair of machinery, implements, utensils and other articles employed by the taxpayer for the purposes of his trade;
Sections 23(b) and 23(m)
- Deductions not allowed in determination of taxable income.—No deductions shall in any case be made in respect of the following matters, namely:
(b) domestic or private expenses, including the rent of or cost of repairs of or expenses in connection with any premises not occupied for the purposes of trade or of any dwelling-house or domestic premises except in respect of such part as may be occupied for the purposes of trade:
(a) such part shall not be deemed to have been occupied for the purposes of trade, unless such part is specifically equipped for purposes of the taxpayer’s trade and regularly and exclusively used for such purposes; and
(b) no deduction shall in any event be granted where the taxpayer’s trade constitutes any employment or office unless:
(i) his income from such employment or office is derived mainly from commission or other variable payments which are based on the taxpayer’s work performance and his duties are mainly performed otherwise than in an office which is provided to him by his employer; or
(ii) his duties are mainly performed in such part;
(c) – (j) and (l) . . . . .
(k) any expense incurred by:
(i) a labour broker as defined in the Fourth Schedule, other than a labour broker in respect of which a certificate of exemption has been issued in terms of paragraph 2 (5) of the said Schedule;
(ii) a personal service company as defined in the said Schedule; or
(iii) a personal service trust as defined in the said Schedule, other than any expense which constitutes an amount paid or payable to any employee of such labour broker, company or trust for services rendered by such employee, which is or will be taken into account in the determination of the taxable income of such employee;
(m) subject to paragraph (k), any expenditure, loss or allowance, contemplated in section 11, which relates to any employment of, or office held by, any person (other than an agent or representative whose remuneration is normally derived mainly in the form of commissions based on his or her sales or the turnover attributable to him or her) in respect of which he or she derives any remuneration, as defined in paragraph 1 of the Fourth Schedule, other than:
(i) any contributions to a pension or retirement annuity fund as may be deducted from the income of that person in terms of section 11F;
(ii) any allowance or expense which may be deducted from the income of that person in terms of section 11(c), (e), (i) or (j);
(iiA) any deduction which is allowable under section 11(nA) or (nB); and
(iv) any deduction which is allowable under section 11(a) or (d) in respect of any rent of, cost of repairs of or expenses in connection with any dwelling house or domestic premises, to the extent that the deduction is not prohibited under paragraph (b);
Requirements of section 11
In order to qualify for a deduction, a home office expense must meet the requirements of section 11. Expenditure such as maintenance, rates and taxes, and wear-and-tear on office equipment, would usually satisfy the requirements of section 11. Section 11, and home office expenses, has no distinction between taxpayers in employment, taxpayers that are holding an office or other taxpayers.
Requirements of section 23(m)
Section 23(m) is applicable if the taxpayer is in receipt of remuneration derived from employment or the holding of an office, unless the remuneration is derived mainly from commission based on sales or turnover. Deductions available to the taxpayer are limited under section 23(m) to the deductions listed in that section. As far as home office expenses are concerned, the taxpayer will only be able to claim rental, repairs and expenses incurred in relation to a dwelling house or domestic premises under section 11(a) and (d), and wear-and-tear allowances under section 11(e).
Requirements of section 23(b)
Even though an expense may meet the requirements of section 11 and may be excluded from the prohibition imposed by section 23(m), home office expenditure must still escape the restrictions imposed by section 23(b).
Trade constituting employment
If the trade is employment or the holding of an office, section 23(b) imposes further restrictions on claiming a deduction. The restriction depends on whether or not the income from employment that the employee receives constitutes mainly commission.
The income derived from this trade must be mainly from commission (i.e. commission must exceed 50% of the total income from employment or the office) or other variable payments which are based on the taxpayer’s work performance.
The employee’s duties may also not be performed mainly in an office provided by his or her employer. Typical examples of employees who could meet this requirement are travelling sales representatives who spend the majority of their time on the road visiting clients; and commission-earning information technology consultants who spend the majority of their time at their client’s premises.
(b) Non-commission earners
For employees who do not earn mainly commission, their duties must be performed mainly (more than 50%) in that part of the private premises occupied for purposes of trade. Employees who do not earn commission but who spend the majority of their time on the road visiting clients, perform their duties mainly at their clients’ premises and, as a result, they do not qualify for a deduction under section 23(b).
Typically, the type of home office expenditure referred to in section 23(b) are:
rent of the premises;
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
SARS accepts that the correct method to calculate the proportion of expenditure attributable to a part of a premises occupied for purposes of trade, is apportionment based on floor area of the premises. When using this methodology, it is imperative that the entire area of all of the buildings on the property are used to calculate the portion of expenditure attributable to the home office, and not only the area of the main dwelling.
Under no circumstances will an estimate of the floor area be allowed. The taxpayer must be in a position to prove the exact floor area of the premises and the part attributable to the home office.
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).
Only expenses relating to the premises must be apportioned based on floor area (such as for 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.
If you qualify for a deduction in respect of a home office you will need to insert the amount calculated next to the source code 4028 (Home Office Expenses) in the “Other Deduction” container on your Income Tax Return (ITR12).
Are there any Capital Gains Tax (CGT) implications if I sell my house used partially for trade?
The first R2 million of a capital gain or capital loss on the disposal of a primary residence must be disregarded for Capital Gains Tax (CGT) purposes. If the proceeds in respect of the disposal of the primary residence are R2 million or less, any capital gain thereon must also be disregarded. However, if a primary residence has been used by a taxpayer partially for purposes of carrying on a trade, such as in the case of a taxpayer that makes use of a home office, then the primary residence exclusion of R2 million must be apportioned for the non-residential use; and the R2 million-proceeds rule for disregarding any capital gain, does not apply to the part of the premises used for purposes of trade. The apportionment will be based on the proportion of the floor area used for business and private use, and must be applied to the total capital gain to arrive at a private portion of the capital gain, and a business portion of the capital gain.
If more than 50% of the property is used for business purposes, the property will not be a “primary residence” as defined and the total gain, including any gain on the private portion of the residence, will be subject to CGT. CGT is payable on the business portion of the capital gain whether or not the taxpayer claimed, or was entitled to claim, a deduction against income in respect of home-office expenses.
Author Craig Tonkin