Calculating the capital gains tax from the sale of your home becomes a lot more complicated if you use part of your residence for business purposes. We asked the South African Revenue Service to guide us through this particular taxation minefield.
The people who write our tax legislation certainly know how to confuse the country's taxpayers. In fact, so successful are they at creating ambiguities and riddles, that it's almost inconceivable that any taxpayer whose income is more complicated than a straight salary or wage subject to Standard Income Tax on Employees (SITE) could possibly pay the correct amount of tax, no matter how hard he or she tries.
Take, for example, the exemption from capital gains tax (CGT) for the first R1 million of capital gain you make on your primary residence (the one you live in).
At face value it sounds very simple: If you sell your house, the capital gain will be calculated according to tax legislation and, to the extent that that gain exceeds R1 million, it will be subject to CGT.
But what happens if you work from home as the sole proprietor of a business, and you have been claiming some of your expenses - electricity, water, interest on your home loan, rates and so on - as expenses relating to your business?
Say, for example, you were using 30 percent of your home for business purposes and were claiming 30 percent of your expenses as a tax deduction against your income. What happens when you sell your home?
The R1 million exemption from CGT does not apply to any gain you make on that portion of your home that was used for business purposes. So 30 percent of the gain you make on your house when you sell it will be subject to CGT.
How can you ensure that all of the gain you make on your home is included for the R1 million primary residence exemption? When must you stop claiming the business expenses as a tax deduction? One year before you sell your house? Two years? More?
The law relating to the primary residence CGT exemption talks about how the residence is "used" and not what tax claims you have made because you were working from home.
Of course, if you stop claiming the income tax deductions, the South African Revenue Service (SARS) might not be aware of the fact that the house was used for something other than a primary residence. But, in terms of the law, the R1 million exemption is dependent on the period for which the residence was used, or mainly used, for domestic purposes, and the portion of the residence which was used for trade purposes over that period.
So, in the example above, although the home was mainly used for domestic purposes, part of it was also used for trading purposes after October 1, 2001, when CGT was introduced. At the time of its sale or disposal, the R1 million would need to be apportioned for the period of time and the portion of the residence that was used for trading purposes. However, since the law is not clear, it is debatable how the apportionment should be applied.
We asked Franz Tomasek, the assistant general manager of SARS, how to deal with our example. This, according to him, is the procedure to follow:
You bought your home on October 1, 2001 for R200 000. You sell it for R1.3 million on October 1, 2006. In the five years you owned your home, you used 30 percent of it for business purposes in two years.
Step 1.
Calculate the overall capital gain.
Proceeds R1 300 000
Less base cost - R200 000
Overall gain = R1 100 000
Step 2.
The overall gain should be apportioned according to how long the home was used exclusively for domestic purposes and how long it was used both as a home and a place of business. In this case, the residence was used exclusively as a home for three years out of five.
Portion of gain made when residence was exclusively a home: Three-fifths of R1 100 000 = R660 000.
Portion of gain made during dual-purpose use of home: Two-fifths of R1 100 000 = R440 000.
Step 3.
The gain made during the dual-purpose period should be split proportionally according to how much of the house was used as a residence and how much was used for business purposes.
Gain made on the portion used as a residence: 70 percent of R440 000 = R308 000.
Gain made on the portion used for business purposes: 30 percent of R440 000 = R132 000.
Step 4.
Calculate the total gains on the residence used for residential purposes and business purposes and determine the tax applicable.
Gain made on the portion used for residential purposes: R660 000 + R308 000 = R968 000
None of this gain is taxable as it is less than the R1 million exemption for gains made on your primary residence.
Gain made on the portion used for business purposes: R132 000
This will be a taxable gain because it is not covered by the primary residence exemption.
In terms of CGT legislation, the first R10 000 of capital gains you make in any year is exempt from CGT. So your taxable gain will be R122 000. CGT is calculated on 25 percent of this taxable gain - in this case, on R30 500. You must add the taxable gain, the R30 500, to your taxable income in that year.
And another thing
The same principle applies if you have not actually lived in your home for a period since October 1, 2001. Again, you would have to apportion your gain according to the periods of occupation and absence.
However, the good news is that this does not apply if you rented the property and you were away from home for five years or less, provided that:
- You occupied the residence for a year before and a year after renting;
- You did not have another primary residence while you were renting your property; and
- You either were away from South Africa during that time or working at least 250 kilometres away from your home.
It also does not apply if:
- Your residence was vacant for a short time shortly after you bought it or before you sold it; or
- The residence was still to be built, or was being built; or
- The residence could not be lived in temporarily, due, for example, to major renovations.
Can you claim for home office expenses?
Many people who work from home believe they can claim against tax for a portion of their domestic expenses. The law is specific about this now, and there are certain criteria that must be satisfied:
- In terms of the "exclusive and regular" requirement, a person whose work area at home, or home office, is not equipped specifically for work purposes, or is not used exclusively for such purposes, may not claim the expenses relating to that area as a deduction. In addition, if the room is not used regularly as a work area, the expenses related to it do not qualify for a deduction.
Provided the exclusive and regular requirement is satisfied, a person who is trading for his or her own account, may claim such expenses.
- A person who derives his or her income from employment by another person (an individual, a company, a close corporation or a trust) mainly (that is, more than 50 percent) in the form of commission or other variable payments, may claim the expenses of a home office, provided the income is based on work performance and that the duties are:
* Performed mainly somewhere other than an office provided by the employer, or
* Performed mainly in the work area at home.
Such a person must, however, still satisfy the exclusive and regular requirement.
Thus, for example, if you use your dining room as an office and as a dining room, you may not claim the expenses related to that room, even if you earn only commission income and work entirely from home.
If you earn only salary income, you may not claim any portion of the expenses relating directly to your home as a deduction against your salary, even if you do have a properly equipped area of your home in which you regularly work for your employer.
And if you earn only commission income from selling a product over the telephone, but you do this at your employer's premises, you may not claim a portion of a properly equipped home office, even if you use it regularly in the evenings to, for example, familiarise yourself with the products you sell.
However, if you earn only commission income from selling goods, your employer has not provided you with an office and you maintain an office at home which is equipped and used by you regularly, and only, as an office, you may deduct the expenses pertaining to your home that relate specifically to the portion that constitutes an office. Similarly, you may deduct expenses if you run your own business from a portion of your home that is equipped and used regularly and exclusively by you for your business.
The costs you may claim if you are eligible to make a claim can include, for example:
- A portion of the interest on your mortgage bond.
- A portion of your electricity, rates and water bills.
- Lease costs, or, if you have bought them, a reasonable annual depreciation claim on the cost of the computer, desk, chair, lamp, bookcase, and so on. (Note that a person who earns only a salary, but who is provided with an allowance to buy their own computer or other work-related assets, may also claim these depreciation allowances.)
- Repair and maintenance costs.
- Any other costs that can be said to relate directly to the portion of the home that is used as the office or work area.
- Deborah Tickle is a tax partner at KPMG.
This article was first published in Personal Finance magazine, 1st Quarter 2005. See what's in our latest issue