In the last two years we have seen unprecedented changes in the way we live, work, shop and interact with each other. However, the legislation governing many of these human activities remained stagnant in the 1960s.
An example of this is the legislation governing central office expenses. A global pandemic hit us and almost overnight companies had to adapt to continue their operations. Millions of people started working from home.
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Despite promises in the 2021 Budget Review that tax provisions for traveling and working from home would be reconsidered in terms of their effectiveness, fairness of application, simplicity of use and certainty, nothing has changed.
The legislation is what it is. There are no new proposals, no new amendments. The most recent draft interpretation note issued by the South African Revenue Service (Sars) makes no concessions. He rubbed salt on the wound. It only “elaborated” and “clarified” the existing legislation.
The legislation does not take into account the fact that people had to install fiber or some form of internet access, that they had to find space in their homes to use “exclusively” in order to do their business, and that they had to make sure the lights stay on because Eskom can’t.
The logic behind why employees who have to work from home are prohibited from claiming certain deductions is, well, quite puzzling.
An example is the exclusivity test.
This test ensures that the home office can only be used for the purpose of conducting an income-generating business, and must be used “exclusively” by the taxpayer claiming the deductions.
In South Africa, this is really a “test”. A family of four lives in a three-room house. Mom and Dad share one room, the children share the other room, and the third room is used as a study. Then Covid-19 hit. Mom and Dad were sent home to run their operations from home, which they did for most of the 2020/21 fiscal year.
They shared the study, each with their own desk and their own computer. They will probably not be able to claim any of your expenses. Why? Sars is no exception for shared spaces.
No prohibition, but …
Sars does not prohibit taxpayers from sharing a workspace. However, if they do, it is “very likely” that neither of them will qualify for any deductions, warns Corlia Faurie, ProBeta Training facilitator. She spoke during a South African Tax Institute (Sait) webinar.
In the Sars draft interpretation note, an example is given of a married couple, a lecturer, and a tailor who shared a home office and wanted to claim deductions for home office expenses.
“It is a requirement that the central office be specifically equipped for the purposes of the taxpayer claiming the office of deduction; and that it is used exclusively for such purposes, ”says Sars.
In this example, which may well be the case in many South African households, the couple does not meet the exclusivity test, therefore there are no deductions.
In his initial response to the draft note, Sait said it became clear that the application of the legislation has the effect of being an “elitist” provision; only those taxpayers who have the luxury of maintaining a home office that is used exclusively by a member of the household, for the purpose of that individual’s trade, can claim their expenses.
The National Treasury has worked hard to ensure that income tax legislation remains progressive and fair, but according to Sait, this provision has not been challenged so far.
“The current effect of the legislation is not appropriate in the South African context where rooms are shared by more than one person, or where rooms are multi-purpose,” he says.
According to the institute, employees who must work from home should not be penalized because they do not fit a “historical model” that relies on an individual having exclusive use of a formal home office.
Yes, but … and no
In addition to this disappointing situation, any effort to keep the lights on to earn income by installing a solar system will also not provide you with any tax relief.
Under Section 12B of the Income Tax Act, taxpayers are eligible for a capital allocation for renewable energy, but because it is not listed as an allowable deduction in Section 23 (m), which deals with deductible expenses , there can be no deduction.
The biggest change is perhaps the fact that salaried employees who have a home office and have been qualifying for an interest expense deduction from their mortgage bond will no longer receive this relief.
The deduction of interest under Section 24J of the act is not a deduction allowed under Section 23 (m). Therefore, when the new guidelines take effect in March of next year, the interest on the home loan will no longer be deductible.
Sars has invited contributors to comment on the latest draft interpretation note through January 14.
Sait says he will make more presentations in hopes of seeing “more progressive legislation” that reflects the modern context in South Africa.