Claiming Home Office expenses – a COVID-19 perspective

Claiming Home Office expenses – a COVID-19 perspective

A well-known result of the COVID-19 pandemic has been the way it changed the world of work. Many employees who worked remotely during the lockdown period have since returned to their corporate office while others continue to work from home. The trend towards more flexible working arrangements – working from home – gained ground in the wake of the coronavirus pandemic. However, if you do have a home office (either a dedicated office or a part of your home) it needs to be set up correctly to get the most out of it in terms of productivity and tax savings. Many employees incurred additional expenses over the last few months in setting up such and running home office spaces The question on everyone’s lips now is whether these expenses, or at least a part of it, can be claimed as a tax deduction in the next tax return. The short answer is it depends.

Generally speaking, having a dedicated home office may allow you to claim a tax deduction from SARS if:
  • you are a full-time employee who spends more than half your working hours in your home office,
  • commission-earners whose employers do not provide them with offices and
  • a small business owner or freelancer who always works from home.
The deduction of expenses for maintaining a home office has been quite a controversial issue in the past. The discussion in this blog provides a general overview, but specific circumstances may require closer investigation by your tax practitioner.

Examples of home office expenses

Home office expenses may include:

  • costs of running your office such as office equipment, business calls from private telephones, cleaning and office stationery,
  • the cost of repairs to the premises,
  • interest on the property bond,
  • rental paid if you rent your home,
  • rates and taxes,
  • wear and tear of assets used for purposes of the home office.

The requirements

For home office expenses to qualify for a tax deduction

If you are required to work from home and you have set aside a dedicated space where you conduct your work or “trade”, you may be allowed to deduct certain home office expenses for tax purposes. These deductions are calculated on a pro-rata basis. However, the space (a room or a part of a room) in your house will only be considered to be used and occupied for trade purposes if both of the following requirements are met:

  • such part of your home is specifically equipped for the purposes of your trade, your employment and profession, and
  • regularly and exclusively used for the purposes of your trade.

Should the space meet the above requirements, and your trade constitutes employment or holding of an office (for example as a salaried employee), a tax deduction will only be granted with regards to your home office expenses under the following additional requirements: If,

  • the income from your employment or office is derived mainly (more than 50%) from commission or other variable payments and you do not perform your duties mainly (more than 50% of the time) in an employer provided office; or
  • you mainly (more than 50%) perform your duties in your home office (i.e. that room/part of your home/dwelling that is occupied for purposes of trade).

Who is not eligible

No deduction is allowed when salaried employees work mainly from an employer provided office and perform only some duties at home – for example teachers. It is clear from the above that generally, only a few employees who earn salary income only or no/limited commission income would qualify to claim a tax deduction for home office expenses. You should, therefore, only claim such a tax deduction if you are very sure and able to demonstrate and prove to SARS that you meet these requirements. If you are unable to provide proof that you meet all the requirements, rather be cautious by not claiming.

Additional guidelines about home office expenses and tax

  • The tax deduction for home office expenses is generally calculated on a pro-rata basis taking into account the size of the home office (the part in square metres which meets the mentioned requirements) relative to the size of your entire home.
  • Including the requirement to use a space (a room or part of a room) in your house for trade and business purposes in your employment contract with your employer, will strengthen your tax position should SARS request you to prove this.
  • If you are a salaried employee who qualifies for a home office tax deduction, you should ideally receive an allowance from your employer against which you can claim the tax deduction in your tax return.
  • Your home office doesn’t need to be an entire room and can be only part of a room, provided that part is specifically equipped for the purposes of your trade and regularly and exclusively used for this purpose.
  • Household expenses incurred for the home office which you may include in your home office tax deduction are your bond interest, if renting a dwelling the rent paid by you, rates and taxes, electricity, insurance, domestic worker’s wages, cost of repairs etc.
  • In addition to household expenses, other claimable amounts include wear and tear on furniture, fittings and equipment used in your office for business purposes. The cost of these assets may be written off for tax purposes over their anticipated useful lifespan. The cost of business calls made from your private home telephone line and/or cell phone may also be claimed as a tax deduction.
  • It is important to note that claiming a tax deduction for home office expenses may have implications for capital gains tax when you sell your home in future. This is because any capital gain on the sale of the property will be apportioned with reference to the extent to which the property was used for business purposes. The R2-million ‘primary residence’ exclusion (for natural persons and special trusts) will only apply to the portion of your home used for domestic purposes.
  • Capital expenditure – buildings and other structures of a permanent nature cannot be deducted as home office expenditure for tax purposes. Any expense that is of a capital nature does not qualify for a wear and tear allowance – whether an employee’s remuneration is derived mainly from commission or not. The cost of any portion of the employee’s domestic premises and improvements thereto may not be deducted.

Potential future changes

Various stakeholders submitted a proposal recently to National Treasury, requesting they provide relief to taxpayers who were forced to work from home and who incurred business-related expenditure as a result. This is given that most salaried employees were (or still are) required to work from home and would likely not be able to claim a tax deduction for home office expense based on the current legislation. To avoid taxpayers having to keep detailed records, the proposal is that a deemed tax deduction be permitted – by permitting taxpayers working from home, for example, to claim an income tax deduction at a prescribed hourly rate.

A comparison between manual and computerized accounting systems

A comparison between manual and computerized accounting systems

Most small to medium-sized companies use either a manual or a computerized accounting system to track income and expenses. Assets, liabilities, revenue, expenses and equity must be documented and transferred to a general ledger containing the company’s financial details. This information can then be analysed to help business owners make future financial decisions. This article compares the differences between the two. We look at it from a time and efficiency, accuracy, reliability, creativity in analysis, reporting, staffing and cost point of view.

Time and efficiency
Computerized accounting has the advantage of increased efficiency and time management when compared to manual accounting. Computers may more rapidly perform accounting functions or assessments than manual accounting systems, once data has been entered into the system.

Accuracy
Computerized accounting has the advantage of higher accuracy when compared to manual accounting, according to the College Accounting Coach. The potential for human error is greater when employees are manually completing accounting procedures. This may be particularly true when dealing with multiple currencies, since computerized programs can instantly convert exchange rates, according to “Guide to Computerizing Your Accounting System” from The Manager’s Electronic Resource Centre.

Reliability

The advantages of manual or computerized accounting systems may be equal when it comes to reliability. Manual accounting can function independently of machines so work can continue when “the system” is off.

But with modern backup systems and increased functionality, the disadvantage of reliability in computerized accounting may be lessened.

Creativity in Analysis

Although computerized accounting systems are experts at rapidly computing complex analyses of accounting transactions and reports, the subtlety and focus of an analysis’ conjecture or hypothesis depends on the person operating the system. From this point of view, manual accounting may have an advantage over computerized accounting systems. Without the nuance and experience of an actual person, computerized accounting systems lose their potential for sophisticated analysis. Additionally, analysis may be hampered or obstructed by software design.

Reporting

The advantages of computerized accounting include fast, complex reporting. Computerized systems can produce invoices, purchase orders and other documents more quickly. Many reports are automatically updated and instantly available.

Staffing

Neither manual nor computerized accounting systems take the advantage when it comes to staffing. It can be costly to staff qualified accountants to complete manual accounting processes, but it can also be costly to staff accountants familiar with specific computerized accounting software and programming.

Cost

When it comes to cost comparison, implementing a computerised accounting system can be a costly exercise. However, once set up correctly, modern automated accounting systems have the advantage of reducing the accounting staff payroll bill as much of the tasks previously performed manually are being taken over by computers.
Please feel free to contact Accounting Avenue for more information on any of the above. Our staff are qualified to assist in setting up and/or maintaining automated accounting systems that comply with latest global trends and current tax legislation. We take care of all your accounting and tax needs enabling you to focus on your business.

Medical Expenses

Medical expenses claim for individuals

As you are aware, 2019 tax season opened on 1 July for those who use efiling and 1 August for non-provisional individuals.
Closing dates are as follows:
• Branch filing closes on 31 October 2019
• eFiling closes on 4 December 2019
• Provisional taxpayers have until 31 January 2020 to file via eFiling.

For more information on tax season 2019 for individuals, check out SARS’ website at https://www.sars.gov.za/TaxTypes/PIT/Tax-Season/Pages/default.aspx.  Today’s focus, however, is on medical expenses and what portion to include in your tax return as a claim and what not. I had a call the other day from a client saying his wife was at the hair dresser where she overheard somebody saying that if one is over the age of 65, all medical expenses can be claimed, regardless of the nature of it. According to the person making the statement, one could claim for general day-to-day expenses like head ache pills, flue medicines, vitamins etc. This is not true! The new rules for medical aid contributions and expenses that can be used as a claim in your tax return are complex. We recommend you contact us for advice on your specific circumstances.

Contributions paid by the taxpayer

Only qualifying contributions which were paid to a registered medical scheme (and that can be proven to have been paid by a taxpayer either directly or indirectly), will be taken into account in determining the Medical Tax Credit that the taxpayer will be entitled to claim.

The taxpayer claiming the contributions must be able to prove that he or she actually paid the contributions.

Qualifying contributions paid by a person other than the taxpayer  will not be taken into account when the Medical Tax Credit is determined, except for –

  • Qualifying contributions paid by the estate of a deceased taxpayer for the period up to the date of the taxpayer’s death. These costs are deemed to have been paid by the taxpayer on the day before his or her death; and
  • Qualifying contributions paid by an employer of a taxpayer, to the extent that the amount has been included in the income of the taxpayer as a taxable benefit.

Qualifying contributions

Contributions paid by the taxpayer for him- or herself, and any dependant (as defined in the Medical Schemes Act), to a medical scheme registered under the Medical Schemes Act, may be taken into account when the Medical Tax Credit is determined. Contributions paid by the taxpayer to any other fund registered under similar provisions in the laws of any other country, may also be taken into account. Certain medical-related arrangements or products are marketed by entities that are not regulated by the Medical Schemes Act, for example, long-term insurers. These products do not qualify for a Medical Tax Credit in South Africa; similarly if a foreign product is marketed by an entity that is not regulated under legislation that is similar to the Medical Schemes Act, it will not quality for a Medical Tax Credit. A South African employer that makes contributions to a foreign medical scheme in respect of an employee has the obligation to determine whether the legislation which governs such foreign scheme is similar to the provisions of the Medical Schemes Act and whether such contributions will therefore qualify for a Medical Tax Credit. Contributions made by a taxpayer to any registered medical scheme in respect of him- or herself and any dependant will be a qualifying contribution. It is not a requirement that the taxpayer’s spouse or dependant, for example, be admitted as a dependant on the taxpayer’s medical scheme in order for the taxpayer to qualify for a Medical Tax Credit. The requirement is that the taxpayer’s spouse or dependant merely be admitted on any registered medical scheme.

Qualifying medical expenses

Expenses paid by a taxpayer during the year of assessment to any duly registered –

(i) medical practitioner, dentist, optometrist, homeopath, naturopath, osteopath, herbalist, physiotherapist, chiropractor, or orthopaedist for professional services rendered or medicines supplied to the person or any dependant of the person;

(ii) nursing home or hospital or any duly registered or enrolled nurse, midwife or nursing assistant (or to any nursing agency in respect of services of such nurse, midwife or nursing assistant) in respect of the illness or confinement of the person or any dependant of the person; or

(iii) pharmacist for medicines supplied on the prescription of any person mentioned in subparagraph (i) for the person or any dependant of the person, will be taken into account in determining the Additional Medical Tax Credit, provided these expenses have been paid for the taxpayer or any dependant of the taxpayer.

In order for the expenses to qualify for the Additional Medical Tax Credit, the expenses must not have been recoverable by the taxpayer from any person, for example, from the taxpayer’s medical scheme or an insurer under a medical gap cover insurance plan.

Amount of additional medical expenses tax credit to be deducted from tax due

The calculation of the ADDITIONAL MEDICAL TAX CREDIT to which a person is entitled, is determined based on the following categories:

• Taxpayers aged 65 years and older
• Taxpayers with a disability
• Taxpayers under the age of 65

Taxpayers aged 65 years and older

Persons aged 65 years and older could qualify for the ADDITIONAL MEDICAL TAX CREDIT, which is calculated as follows: Qualifying medical expenditure paid during the year of assessment, amounting to –
  • 33,3% of the fees paid to a medical scheme or qualifying foreign fund as exceeds three times the amount of the MEDICAL TAX CREDIT to which that person is entitled; plus
  • 33,3% of qualifying medical expenses paid (out-of-pocket expenses).
To simplify this calculation, the following formula can be used: 33,3% × {[A – (3 × B)] + C} in which formula— “A” represents fees paid to a medical scheme or qualifying foreign fund for the year of assessment; “B” represents the MEDICAL TAX CREDIT for the year of assessment; and “C” represents all qualifying medical expenses paid during the year of assessment.

Taxpayers with a disability

Section 6B(3)(b) recognises, as qualifying medical expenditure, amounts (other than expenditure recoverable by the taxpayer or his or her spouse) necessarily incurred and paid by the taxpayer in consequence of a disability suffered by him or her, his or her spouse or his or her child. The following ADDITIONAL MEDICAL TAX CREDIT may be claimed in respect of qualifying medical expenditure paid during the year of assessment:

  • 33,3% of the fees paid to a medical scheme or qualifying foreign fund as exceeds three times the amount of the MEDICAL TAX CREDIT37 to which that person is entitled; plus
  • 33,3% of qualifying medical expenses 38 paid (out-of-pocket expenses).

To simplify this calculation, the following formula can be used: 33,3% × {[A – (3 × B)] + C} in which formula—

– “A” represents fees paid to a medical scheme or qualifying foreign fund for the year of assessment;
 – B” represents the MEDICAL TAX CREDIT for the year of assessment; and
– “C” represents all qualifying medical expenses paid during the year of assessment, including disability expenditure.

Taxpayers under the age of 65

Without a Disability.  In addition to the MEDICAL TAX CREDIT, a taxpayer who is under 65 years of age will be entitled to an ADDITIONAL MEDICAL TAX CREDIT that is limited to 25% of the amount by which the sum of the amounts listed below exceeds 7,5% of the taxable income (excluding retirement fund lump sum benefits, retirement fund lump sum withdrawal benefits, and severance benefits) before taking into account this ADDITIONAL MEDICAL TAX CREDIT:

(i) All contributions made by the taxpayer to a registered medical scheme (in respect of the taxpayer, his or her spouse and any dependant) that exceeds four times the MEDICAL TAX CREDIT; and
(ii) Actual qualifying medical expenses (including physical impairment expenses) paid by the taxpayer and not recoverable from the medical scheme in respect of the taxpayer, his or her spouse or child and any dependant.

In (ii) above, the following expenses must be taken into account in the determination of the ADDITIONAL MEDICAL TAX CREDIT:
• All qualifying out-of-pocket medical expenses relating to services and prescribed supplies; and
• Expenses relating to a physical impairment (if applicable).

To simplify this calculation, the following formula can be used:
25% × {[A – (4 × B)] + C] – (7,5% × D)}
in which formula—
“A” represents fees paid to a medical scheme or fund for the year of assessment;
“B” represents the MEDICAL TAX CREDIT for the year of assessment;
“C” represents all qualifying medical expenses paid during the year of assessment; and
“D” represents taxable income (excluding any retirement fund lump sum benefit, retirement fund lump sum withdrawal benefit and severance benefit).

Annual leave

Annual leave

We get a lot of phone calls from employers on annual leave. How exactly does the calculation of annual leave work?  This blog post explains only the basics about annual leave. For a more thorough understanding of the Basic Conditions of Employment Act, please email us on info@accountingavenue.co.za or call 060 897 8098. As mentioned, the part of the act dealing with annual leave is Chapter 3, sections 20 and 21 of the Basic Conditions of Employment Act, Act 75 of 1997.

According to this piece of legislation, annual leave does not apply to employees who work less than 24 hours per month for an employer. In terms of the Act, annual leave accrues to an employee. What does this mean? Well, in its simplest form it means each leave cycle starts at zero available days and the amount of leave days accrue at a certain rate per month as the year goes by. Leave accrues at the rate of one hour for every 17 hours worked, or one day for every 17 days worked, or 1,25 days per month.

The total permitted minimum being 15 working days per annum on full pay in each annual leave cycle or in each period of 12 months calculated from the date of employment. The act mentions 21 consecutive days. What does this mean? This simply means 15 working days per annum if the employee works a 5-day week. If you look at the calendar you will see that 21 consecutive days equals 15 working days (if the employee works from Monday to Friday).

But what if the employee works, say, 6 days a week? How do you calculate it then? Well, let’s apply the law. If the employee works Mondays to Saturdays (six days a week), count 21 consecutive days from the beginning of any month. Now calculate the amount of working days (Mondays to Saturdays) within that given 21 consecutive days. The answer will be 18. In other words the employee will be entitled to 18 days paid annual leave. As mentioned the act is not applicable to employees working less than 24 hours a month. This means that the so-called independent contractors and temporary workers are also entitled to annual leave. Things can get a little complicated when it comes to the accumulation of annual leave and the fact that leave must be granted within 6 months after the end of the annual leave cycle. Don’t hesitate to contact us for further information on this. It is advisable that all companies should have a formal leave policy. This policy should be clear on the employer’s rules and regulations on annual leave, such as annual shut down periods, sick leave, unpaid leave etc. Should you require any further information, please email info@accountingavenue.co.za or call 060 897 8098.