REMOTE WORKING TAX CONUNDRUMS FOR EMPLOYERS AND EMPLOYEES IN SOUTH AFRICA
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. In fact, international research indicates that employers expect hybrid working (a mix of remote and office-based work) to become a permanent workplace feature.
To some extent, remote working or hybrid working means that employees incur expenditure which would otherwise be covered by their employers. 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. Also, there is some confusion as to the qualification criteria and permissible deductions.
SARS has apparently been inundated with queries in this regard and has, in May of this year, issued an updated version of Interpretation Note 28 (IN28) regarding the deduction of home office expenses by employees or office bearers. While this is a very detailed interpretation note, the message comes across quite clearly that SARS is adopting a very strict approach in respect of what qualifies as permissible home office expenses.
On 1 July, SARS issued a further note on their website in which they provide guidance regarding what constitutes a ‘home office’. They caution that the decision by a homeowner to claim home office expenditure can have a negative impact on a future capital gains termination. They then further note that ‘there is a likelihood that a taxpayer who claims home office expenses for the first time will be selected for verification or audit’.
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.
Home office deduction requirements
Taxpayers hoping to claim a tax deduction of 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, 1962 (ITA).
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.
Updated IN28 adopts a strict interpretation of ‘exclusive use’. Example 3 in IN28 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 (the only north-facing room in the house) 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 which is specifically equipped for purpose of their respective trades. SARS concludes that as they share the home office space, it has not been occupied exclusively for their respective trades and therefor does not qualify for the deduction. However, while SARS does not state that as a possibility, it is arguable that each of them should be able to claim a pro rata portion of the office space as a deduction, based on the area used exclusively by each of them.
Under the heading ‘Permitted expenditure’, IN28 states that permissible expenditure is limited to rent, costs of repairs or expenses in connection with the premises. This is based on the wording of section 23(b), which refers to ‘expenses in respect of the part of the employee’s house occupied for trade’. SARS expresses the view that it does not include expenses such as phone costs, the initial costs in setting up a fibre installation or telecommunications expenses. While one may not necessarily agree with the SARS views in this regard, the reality is that SARS would most likely disallow these types of expenses and that it is not financially viable for an employee to refer such a dispute to alternative dispute resolution or court.
Employers are often requested to issue letters confirming that employees performed their duties mainly in a home office. SARS advises in IN28 that it cannot accept such letters, as it is generally not within an employer’s personal knowledge whether or not the employee actually performed their duties from a home office. An employer would, at most, be able to confirm that the employee was permitted to render services remotely and that the employee was not present at the employer’s premises for a particular number of days in the tax year.
Employees who own their own homes and who qualify to claim a deduction in terms of section 23(b), must take into account the impact thereof on a future capital gain, and more specifically on the primary residence exclusion on the sale of their homes. As income tax rates are higher than capital gains tax rates (CGT), it should be of more benefit to claim home office expenses as a deduction against income tax, than to pay CGT on a capital gain. However, it is important for a taxpayer to be aware of this.
IN28 makes it quite clear that it will be difficult for taxpayers to claim home office deductions. 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 (e.g. in respect of printer cartridges and paper, data and cell phone costs), it is important to consider how such assistance is provided.
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. 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.
Neither the ITA nor SARS provides guidance in respect of what will qualify as ‘business expenditure’. Employers should thus (for example, in respect of data or phone costs) implement a reasonable methodology for determining the amount of the advance or reimbursement.
Also, in terms of the Seventh Schedule to the ITA, if an employer provides a mobile phone or computer equipment to an employee, the use thereof will not be a taxable fringe benefit if the employee uses it mainly for the purpose of the employer’s business.
Depreciation (‘wear and tear’)
An often-overlooked tax deduction is the fact that employees (irrespective of whether or not they qualify for a home office deduction) could potentially claim a depreciation allowance in respect of items used for the purposes of their trade, such as office equipment. This is specifically provided for in section 23(m) of the ITA as an exception to the general prohibition on deductions by employees in relation to their trades.
Employees who have acquired equipment such as, for example, office furniture or equipment for the purpose of their trades, may thus qualify to claim the costs thereof as a deduction against their incomes. Employees must keep in mind that different assets may be depreciated over different periods. They should take this in account when claiming a wear and tear allowance.
To conclude, while it may be difficult or impossible for many employees to claim home office expenses in terms of section 23(b), employees may still be able to claim a depreciation allowance in respect of assets. Also, employers should consider how to hold employees harmless in respect of business expenditure. This should (except in respect of travel or subsistence allowances) not be done by way of an allowance.