Since the start of national lockdown on 26 March last year, salaried employees have been working from home, some without support from their employers, despite being without a choice and for many, without added remuneration.
In an effort to combat the spread of Covid 19 and its consequences, many employees have had to establish a ‘home office’ using their own finances and resources. Does the Income Tax Act allow for any relief for this?
Typical expenses that an employee would need to incur include:
• improvements to the premises;
• software programmes;
• software licences;
• internet connection;
• printer/scanner/copier, and
In addition, regular expenses to consider are:
• rent or interest on a mortgage bond;
• levies – electricity and water;
• municipal charges;
• repairs and maintenance;
• software upgrades; and
• depreciation/wear and tear
To be eligible to claim home office expenses against remuneration, Section 11 of the Income Tax Act states that only a person carrying on a “trade” shall be allowed to claim the following deductions from the income derived from such trade:
- losses and expensed actually incurred in the year of assessment in the production of the income but not expenses of a capital nature;
- expenditure actually incurred on repairs to the property occupied for purposes of that trade and machinery and other utensils used by the person for purposes of his/her trade.
Whereas employment is included in the definition of “trade” in the Act, all the expenses mentioned above would be deductible thereby reducing the employee’s taxable income which would, no doubt, result in a refund from SARS. That would indeed be the case if it was not for the limiting or exclusionary provisions found in Section 23 of the Act and more specifically Sub Sections (b) and (m).
The first exclusion is that no deduction shall be allowed for domestic, private and/or non-trade related expenses. However, if a part of a home is specifically equipped for and occupied and exclusively used for purposes of a trade (employment) and is used regularly, such expenses relating to that part of the home will be deductible as long as the employment is performed mainly from that home office.
What the first restriction means is that the part of the home or home office used by the employee must only be used by that employee and nobody else and it can only be used for purposes of employment and nothing else. In addition, more than half of the work performed by the employee must be from his/her home office or part of the home dedicated as a home office. If any one of these is not complied with, none of the home office expenses will qualify for a deduction.
The second limit or restriction, and possibly the most significant for the employee, is that no home office deduction will be allowed other than:
- the portion of rent or bond interest, relative to the percentage the the floor space of the home office bears to the whole building;
- the cost of repairs specific to that home office portion; and
- wear and tear (depreciation) allowance on office equipment.
The harsh reality is that the only set-up costs that can be claimed are the improvements directly related to the actual portion of the building occupied and used solely as a home office and for nothing else.
The only regular expenses, and probably the most costly, that can be claimed as a deduction are the pro-rata portion of the monthly rent (or interest on the mortgage bond), rates and taxes, electricity, cleaning and the depreciation on the office equipment.
All the other expenses listed cannot be claimed by the employee. However, these expenses can be claimed by the employer as expenses incurred in the production of the employer’s income. One solution is, therefore, that the employee can be -reimbursed for the expenses by the employer. The employee will not be taxed on the reimbursement as this is regarded as an expense incurred on behalf of the employer and not as income. The employee would also not be subject to a fringe benefit tax as the home office and equipment would not be used for any private purposes.
Currently, the limitation placed on the employee in order to benefit from working at home is no real incentive at all for most employees. This is a very sad and depressing situation as currently employees are working from home, not out of choice but in order to prevent themselves and their family from contracting and spreading the coronavirus. Employees working from home are, by and large, law abiding citizens, heeding the call of, and working with, the government to prevent deaths and increasing the capacity of the country’s under-resourced hospitals. This is at a significant cost to an already suffering society. It is suggested that the Minister of Finance should, at least for the duration of the lockdown, allow home office employees to claim the reasonable set up costs and regular expenses that they incur while having to work from home.