The Covid-19 pandemic has given rise to an unprecedented shift to remote working which is likely to persist, at the very least, for the remainder of 2021, says law firm Bowmans.
To some extent, remote working or hybrid working means that employees incur expenditure that would otherwise be covered by their employers, the firm said.
This could range from airtime and data to buying office furniture and equipping a home office.
“Tax filing season for individuals opened on 1 July 2021. Before the lockdown, most employees were unable to claim home office expenditure as they were generally required to render their services mainly at their employers’ premises.
“As this is the first filing season since remote working became more prevalent, the question as to whether home office expenses can be claimed as a deductible expense, has become very topical.”
However, Bowmans said that there is still some confusion as to the qualification criteria and permissible deductions.
While SARS has moved to clarify this in recent notices, it also cautioned of negative consequences for incorrect claims.
“While it is clear that SARS will be very strict in respect of the deduction of home office expenses, it is important for employers and employees to be aware of other tax structuring opportunities and deductions in this regard,” Bowmans said.
Home office deduction requirements
Taxpayers hoping to claim a tax deduction for expenses incurred as a result of working from home are required to overcome a number of hurdles to successfully claim such deductions.
Employees may only claim specific types of expenses as a deduction against remuneration, one of which is the home office deduction as provided for in section 23(b) of the Income Tax Act, Bowmans said.
In terms of this section, an employee may only claim domestic or private expenses in respect of the part of the employee’s house occupied for trade if:
- Such part is specifically equipped for purpose of the taxpayer’s trade and regularly and exclusively used for such purpose; and
- The employee’s income is either derived mainly from a variable form of remuneration such as a commission, and his/her duties are mainly (more than 50%) outside the employer’s office; or the employee’s duties are mainly performed in such home office.
Bowmans said that a recent interpretation notice from SARS adopts a strict interpretation of ‘exclusive use’.
SARS refers to the scenario where a tax consultant works from a home office that is specifically equipped and regularly used for purpose of his employment.
However, as he allows his children to play in this room on winter afternoons and on weekends, SARS concludes that it is not exclusively used for purpose of his trade and thus does not qualify for a home office deduction.
SARS further refers to the example of a husband and wife who share an office space that is specifically equipped for purpose of their respective trades.
The revenue concludes that as they share the home office space, it has not been occupied exclusively for their respective trades and therefore does not qualify for the deduction.
The note makes it quite clear that it will be difficult for taxpayers to claim home office deductions, Bowmans said,
“Ironically, this rule favours the wealthier taxpayer who can afford to have a separate study. Those employees who had to work on the dining room table or who had to cram a desk into the corner of another room will find it more difficult to claim such a deduction.
“The rules are quite complex, and employees are encouraged to obtain the assistance of a tax advisor to assist them should they wish to claim such a deduction.”
Other costs – allowances vs reimbursements
The fact that an employee cannot claim home office expenses, does not mean that he or she cannot qualify for any other form of tax benefit in respect of home office expenses.
In those instances where employers provide financial assistance to employees in respect of business expenditure – such as printer cartridges and paper, data and cell phone costs – it is important to consider how much assistance is provided, Bowmans said.
“Importantly, an employer should not provide an employee with an allowance in respect of these types of expenses: all allowances, other than for example car and subsistence allowances, are taxed in full and the employee is unable to claim a deduction against such allowances.
“The employee thus has to use taxed income in order to incur a business expense and cannot claim a deduction in respect of such expense.”
If, however, the employer advances the funds to the employee in the form of an advance or reimbursement, the amount will not constitute a taxable fringe benefit, Bowmans said.
“This is subject to the provisions of section 8 of the ITA, including that the employee must have incurred the expense on the instruction of his or her principal in the furtherance of the principal’s trade, and that the employee must produce proof to the principal that the expenditure was incurred as aforesaid.
“Also, where the expenditure was incurred to acquire an asset, the ownership thereof must vest in the principal.”
While the above creates an additional administrative responsibility for the employer, this does permit the employer to reimburse an employee in a tax-efficient manner, Bowmans said.
Commentary by Talia Ben-David and Aneria Bouwer of Bowmans.