The impact of section 23(m) of the Income Tax Act No. 58 of 1962 (the Act), when it was introduced in the 2003 tax year, was to deny a tax deduction for typical business expenditure claimed against employment earnings. For example, entertainment, home telephone and cell-phone business costs cannot be claimed unless the taxpayer is an agent or representative whose “remuneration” is normally derived mainly (i.e. at least 51%) in the form of commission based on sales or turnover attributable to that person. The term “remuneration” refers to the defined meaning thereof for employees’ tax purposes as defined in the Fourth Schedule to the Act.
Furthermore, section 23(m) of the Act applies only to expenditure, losses and allowances which can be claimed under section 11 of the Act. Expenditure, losses and allowances capable of being set off under other sections of the Act are still permitted. Examples include donations under section 18A (donations to a Public Benefit Organisation) and medical aid contributions and medical expenses under section 18 of the Act.
The following expenses and allowances are specifically excluded from the ambit of section 23(m) and are still allowed as deductions:
- Pension and retirement annuity contributions in terms of sections 11(k) and (n).
- Legal expenses (section 11(c)), wear and tear allowances (section 11(e)), bad debts (section 11(i)) and doubtful debts (section 11(j)).
- Insurance policies for loss of income.
With regard to home office expenses, the impact of section 23(m) is that even if a taxpayer’s home office expenses were not disqualified for deduction in terms of section 23(b) of the Act (which disqualified expenses in relation to a dwelling house unless specific criteria were met), the taxpayer is still prevented from claiming most of these expenses (with the exception of depreciation) if the taxpayer does not derive more than 51% of his or her “remuneration” in the form of commission.
The Revenue Laws Amendment Act No. 31 of 2005, recently amended section 23(m), back-dated to 1 March 2002 (the inception date of section 23(m)). The effect of the amendment is that employees, subject to the restrictive rules already contained in section 23(b), will be able to claim most expenditure incurred in using their own premises for business purposes – typically the ‘home study’.
Section 23(b) prohibits domestic or private expenses, including rent or repairs in connection with any premises not occupied for purposes of trade or of any dwelling-house or domestic premises, except in respect of such part as may be occupied for the purposes of trade. This exception is then restricted by the following requirements that must be satisfied before any deduction will be allowed:
- The study, office or other part of the home used for trade must be ‘specifically equipped and regularly and exclusively used’ for purposes of trade; and
- no deduction is available if the taxpayer’s trade constitutes any employment or office unless –
- the taxpayer’s income from such employment or office is derived mainly from commission or other variable payments which are based on the taxpayer’s work performance and his or her duties are mainly performed otherwise than in an office provided to him or her in an office provided by the employer, or
- The employee’s duties are mainly performed at the home office.
A salesman earning a small fixed salary but who derives most of his income on a commission basis, and who spends less than 50% of his working day at his employer’s premises, will qualify for the deduction of expenditure relating to a home office.
If a salaried employee, in terms of his contract of employment, spends his time (i.e. more than 50% overall) working in his home study, and the remainder of his average working day on the road or in his employer’s office, the home office expenditure will qualify.
The relaxation of the circumstances in which a taxpayer can claim home office expenses will only be applicable to certain taxpayers in very specific circumstances.
Taxpayers who do claim home office expenses should consider the capital gains tax implication. If a taxpayer disposes of his or her home, that portion of the capital gain ascribed to the home office, will be excluded from the R1,5 million ‘primary residence exclusion’ for capital gains tax purposes. This means that the capital gain attributable to the home office will be taxable in full.
Source: Ernst & Young
Source link: https://www.saica.co.za/integritax/2006/1396_Home_office_expenses.htm