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20 MAY 2021 TAX & EXCHANGE CONTROL ALERT IN THIS ISSUE > Potential tax deductions Milnerton Estates revisited: available for employees making Accruals and suspensive use of home offices during the conditions pandemic We had previously reported on the Supreme For many employees in South Africa, remote Court of Appeal’s (SCA) judgment in the case working as a result of the COVID-19 pandemic of Milnerton Estates Ltd v Commissioner has become the new normal and as a for South African Revenue Service 81 consequence, more people are establishing SATC 193 (20 November 2018) in our Tax Alert of and making use of home offices in order to 23 November 2018, as well as on the judgment in accommodate the demands of their employment. the court a quo in our Tax Alert of 14 July 2017. To this end, some of the operational costs associated with places of employment (which are normally paid for by employers) are now being borne by employees. FOR MORE INSIGHT INTO OUR EXPERTISE AND SERVICES CLICK HERE
TAX & EXCHANGE CONTROL
Potential tax deductions available
for employees making use of home
offices during the pandemic
For many employees in South Africa, Section 23(m) provides that employees
remote working as a result of the (other than commission-based earners)
Section 23(m) provides COVID-19 pandemic has become the may only deduct amounts pertaining to
that employees (other new normal and as a consequence, very specific expenses, which include
more people are establishing and pro-rated deductions based on rent,
than commission-based making use of home offices in order interest on mortgage bonds, repairs to
earners) may only deduct to accommodate the demands of their the premises, rates and taxes, cleaning,
amounts pertaining to very employment. To this end, some of the wear and tear, and all other expenses
operational costs associated with places relating to the house. In Interpretation
specific expenses.
of employment (which are normally paid Note 28 (IN 28), issued by the South
for by employers) are now being borne African Revenue Service (SARS), the types
by employees. of expenditure that may be claimed by
employees have been set out as follows –
To the extent that these employees do not
get relief by way of reimbursements from ∞ rent of the premises;
their employers for the actual expenditure ∞ interest on a bond;
incurred by them (within the scope of their ∞ the cost of repairs to the premises; and
employment), certain tax deductions may
∞ other expenses in connection with the
be claimed by employees (in specified
premises – including wear and tear in
circumstances) in order to alleviate
terms of section 11(e) of the Income
the financial burden that they are now
Tax Act.
faced with.
Once the relevant deductions have
The legal principles
been ascertained, the employee will
Generally, the deductibility of expenses have to consider the provisions of
relating to a home office must be section 23(b), which deals with the
determined with reference to section 11 of prohibition of deductions of private and
the Income Tax Act 58 of 1962 (ITA), read domestic expenditure except in specified
with sections 23(b) and 23(m). circumstances. In order for an employee
to be allowed to claim domestic or private
Section 11 (and more particularly
expenses relating to their home offices,
paragraphs (a), (d) and (e) thereof)
the following requirements must be met:
delineates which types of expenses
may be claimed (and the requirements (1) The employee must have a dedicated
to be met in respect thereof), while workspace that is specifically equipped
section 23(m) specifically prohibits certain for the purpose of employment and is
deductions. As such, when an employee used regularly and exclusively by the
considers claiming home office expenses employee for work purposes.
as a tax deduction, they will have to
satisfy themselves that the expenditure in
question qualifies in terms of section 11,
and is further not specifically prohibited in
terms of section 23(m).
2 | TAX & EXCHANGE CONTROL ALERT 20 May 2021
TAX & EXCHANGE CONTROL
Potential tax deductions available
for employees making use of home
offices during the pandemic...continued
∞ Whether these criteria have been (2) Either the employee’s income must
met is a question of fact rather consist mainly of commission or other
Whether a home office than a question of law and it will be variable payments which are based
necessary for an employee to be on the employee’s work performance,
is used regularly and
able to prove that the designated or the employee must perform their
exclusively for work workspace exists. To this end, duties mainly from the dedicated
purposes will have to be it is worth noting that a kitchen workspace in their home.
determined on a case by counter or office space, that is only ∞ To the extent that an employee’s
occasionally used by the employee
case basis. for work purposes, will not satisfy
income consists of more than
50% commission (or other variable
this requirement. payments) this requirement will
∞ While it is necessary to have a be readily met. However, if the
separate space in the employee’s employee is a salaried employee,
home that is allocated for purposes this requirement will only be met if
of performing their employment more than 50% of the employee’s
functions, an employee need not duties are performed for their
necessarily set aside an entire employer from their home office.
room for use as a home office. In ∞ On this basis, an employee must
so far as a portion of a room has have worked from home for more
been equipped and set aside for than 50% of the relevant tax year in
the exclusive use by the employee order to qualify for a deduction of
for work purposes, it is likely that their home office expenses. Where
this requirement will be met. employees work from home for
∞ Whether a home office is used only a couple of days per week,
regularly and exclusively for it will be necessary for them to
work purposes will have to be keep records of the number of
determined on a case by case days that they worked from home
basis. However, it should be borne and the number of days that were
in mind that a home office that spent at the office. If the number
is merely maintained and only of days working from home does
occasionally used by the employee not exceed the number of days
will not suffice. In addition, SARS that the employee works from the
has adopted the view that the use office, then the deduction will not
of a home office for any purpose be allowed.
other than the fulfilment of the
(3) The employee must be allowed to
employee’s employment functions
perform their services from home.
will result in this requirement being
It is not necessary for an employer
unfulfilled.
to expressly instruct an employee to
work from home in order to meet this
requirement as it is a factual inquiry as
to whether the employee did in fact
discharge their duty to the employer
mainly in their home office.
3 | TAX & EXCHANGE CONTROL ALERT 20 May 2021TAX & EXCHANGE CONTROL
Potential tax deductions available
for employees making use of home
offices during the pandemic...continued
(4) The employee has to have actual Comment
expenses that have been incurred,
In the Budget Speech that was delivered
In the Budget Speech which expenses related to
on 24 February 2021, National Treasury
their employment.
that was delivered on announced that the large-scale migration
24 February 2021, National To the extent that an employee meets to remote working over the course of the
each of the requirements set out in pandemic has prompted it to review the
Treasury announced that section 23(b), those home office expenses current travel and home office allowances
the large-scale migration dealt with in section 23(m) and IN 28 regime, with the view of investigating
to remote working over the may be claimed as a deduction on a the efficacy, equity in application and
course of the pandemic pro-rata basis in the employee’s ITR12 simplicity of use thereof. It was stated that
when submitting their tax return for the consultations in this respect will commence
has prompted it to review relevant year of assessment. The amounts during 2021/2022. A review of the use
the current travel and that qualify for the deduction must be and application of the relevant provisions
home office allowances calculated as a percentage of the square in the context of home offices may be
metres of the home office over the total highly beneficial to many employees as the
regime, with the view of
square metres of the employee’s entire requirements for claiming the deductions
investigating the efficacy, house. It is important to note, however, are arduous and the burden of proof on
equity in application and that some expenses are not subject to the employee to demonstrate that they are
simplicity of use thereof. the pro-rata formula (e.g. wear and tear entitled to the deductions is extensive.
on office equipment (the calculation for
In addition to the review to be undertaken
wear and tear is specifically stipulated in
by National Treasury, SARS has updated
section 11(e) of the ITA)).
and amended IN 28, a draft of which
Employees who own their homes and was published for public comment
intend on claiming the tax deduction on 17 May 2021. Amongst others, this
in respect of their home offices should updated IN 28 addresses the previously
be aware of the negative capital gains ambiguous issue of the deductibility of
consequences associated with such claim. expenses pertaining to fibre optic cables
In particular, it should be borne in mind and other telecommunication devices.
that the primary residence exclusion of On the basis that (in SARS’ view) the initial
R2 million that they may be entitled to costs of installing fibre networks are not
when they sell their home will not apply expenses that are incurred in connection
to any capital gain that arises in respect with a premises, and because the initial
of the home office portion of their home. costs and monthly subscriptions are
As such, the primary residence exclusion prohibited from being deducted in terms
will have to be apportioned, which of section 23(m), the view adopted by SARS
apportionment must take into account is that the fibre and telecommunication
the length of time that the home office expenses incurred by employees will not be
was used as a portion of the entire period deductible expenses.
of ownership, as well as the size of the
The closing date for public comment
home office compared to the size of the
on the draft IN 28 is 14 June 2021,
entire property. This should be taken into
and all comments may be sent to
consideration when claiming the home
policycomments@sars.gov.za.
office deduction, as it may create a higher
capital gain in the employee’s hands later
Louise Kotze
on sale of the property.
4 | TAX & EXCHANGE CONTROL ALERT 20 May 2021TAX & EXCHANGE CONTROL
Milnerton Estates revisited: Accruals
and suspensive conditions
We had previously reported on the The taxpayer accordingly did not
Supreme Court of Appeal’s (SCA) account for the accrual of the purchase
The matter concerned some judgment in the case of Milnerton consideration in its 2013 year of
of the general principles Estates Ltd v Commissioner for South assessment and intended to only account
African Revenue Service 81 SATC 193 for it in the 2014 year of assessment.
relating to the accrual (20 November 2018) in our Tax Alert
However, the taxpayer was subsequently
of amounts, and more of 23 November 2018, as well as on
assessed by the South African Revenue
specifically, the deemed the judgment in the court a quo in our
Service (SARS) on the basis that the
Tax Alert of 14 July 2017.
accrual of amounts in terms consideration accrued during the
of section 24 of the Income The matter concerned some of the
2013 year of assessment.
Tax Act. general principles relating to the accrual SARS’s position was that, on the basic
of amounts, and more specifically, the principles, the accrual was not postponed
deemed accrual of amounts in terms of by the requirement that the taxpayer first
section 24 of the Income Tax Act 58 of had to give transfer to the purchaser. In
1962 (Act). the alternative SARS argued that, in terms
of section 24 of the Act, the purchase
The taxpayer had concluded sale
consideration is in any event deemed
agreements for the sale of 25 immovable
to have accrued in the year that the
properties during its 2013 year of
agreement was entered into into in terms
assessment. The sale agreements provided
of section 24 of the Act.
that the purchaser would only make
payment of the purchase consideration On general principles, an amount can be
to the taxpayer “against registration of said to accrue to a taxpayer where the
transfer” of the immovable properties. taxpayer has become unconditionally and
Transfer was given to the purchaser only in un-contingently “entitled” to that amount
the 2014 year of assessment. (see Lategan v CIR 2 SATC 16; Ochberg v
CIR 6 SATC 1; CIR v People’s Stores (Walvis
Bay) (Pty) Ltd 52 SATC 9).
2021 RESULTS
CHAMBERS GLOBAL 2018 - 2021 ranked our Tax & Exchange Control practice in Band 1: Tax.
Emil Brincker ranked by CHAMBERS GLOBAL 2003 - 2021 in Band 1: Tax.
Gerhard Badenhorst ranked by CHAMBERS GLOBAL 2009 - 2021 in Band 1: Tax: Indirect Tax.
Mark Linington ranked by CHAMBERS GLOBAL 2017 - 2021 in Band 1: Tax: Consultants.
Ludwig Smith ranked by CHAMBERS GLOBAL 2017 - 2021 in Band 3: Tax.
Stephan Spamer ranked by CHAMBERS GLOBAL 2019-2021 in Band 3: Tax.
5 | TAX & EXCHANGE CONTROL ALERT 20 May 2021TAX & EXCHANGE CONTROL
Milnerton Estates revisited: Accruals
and suspensive conditions...continued
This would include amounts to which a However, both the Tax Court and the SCA
taxpayer has a legal entitlement or claim, ultimately decided the matter based on
The mere deferral of but which have not been actually received. the application of the deeming provision in
section 24 of the Act.
payment to a subsequent For purposes of the definition of “gross
tax year does not prevent income” in section 1 of the Act, it also does Section 24(1) of the Act provides –
not matter whether the amount is payable
an accrual in a current tax yet or not.
“… if any taxpayer has entered into
year where the taxpayer any agreement with any other
The proviso to the definition specifically person in respect of any property
has actually become provides that if a taxpayer has become the effect of which is that … in the
entitled to the amount in entitled to an amount in a particular tax case of immovable property, transfer
the current tax year. year, but such amount is only payable in shall be passed from the taxpayer to
a subsequent tax year, such amount is that other person, upon or after the
deemed to have accrued to the taxpayer receipt by the taxpayer of the whole
in the year that the taxpayer has become or a certain portion of the amount
entitled to the amount and not the year in payable to the taxpayer under the
which the amount becomes payable. agreement, the whole of that amount
shall for the purposes of this Act
The mere deferral of payment to a
be deemed to have accrued to the
subsequent tax year does not prevent an
taxpayer on the day on which the
accrual in a current tax year where the
agreement was entered into.”
taxpayer has actually become entitled to
the amount in the current tax year. This section effectively provides for a
deemed accrual in certain circumstances
In this regard it must be appreciated
during a particular tax year despite
that it is still required for the taxpayer
there not having necessarily been an
to have become unconditionally and
actual accrual in that tax year as per the
un-contingently entitled to the amount. An
application of the general principles.
accrual can still be suspended by way of an
appropriate suspensive condition. The circumstances in which section 24(1)
of the Act applies is where transfer to the
The Tax Court did consider the particular
purchaser is subject to receipt by the seller
matter on the general principles, and
of the whole or a certain portion of the
provisionally concluded that the purchase
purchase price.
consideration (in respect of all properties,
save one) did accrue to the taxpayer The accrual of the full purchase price will
during the 2013 year of assessment on then be deemed to have occurred during
the basis that the taxpayer had in fact the tax year that the agreement was
become entitled to payment in that year. entered into, and not only when transfer
The relevant suspensive conditions were is passed.
met, and other statutory permissions were
obtained, during that year.
6 | TAX & EXCHANGE CONTROL ALERT 20 May 2021TAX & EXCHANGE CONTROL
Milnerton Estates revisited: Accruals
and suspensive conditions...continued
Effectively, section 24(1) removes any an agreement made provision for the
argument that there is no accrual to passing of ownership on or after receipt
What is of particular interest the seller during the tax year that the of payment, then the accrual will be
agreement is concluded on the basis that deemed to occur on the date that the
here is the argument
the obligation to give transfer is delayed agreement is entered into, irrespective
advanced by the taxpayer until receipt of payment in a subsequent of whether the agreement is subject to
in respect of the application tax year. Stated differently, the seller suspensive conditions.
of section 24 of the Act cannot rely on saying that it is not yet
Essentially the taxpayer argued that to
entitled to the purchase price at the time
to agreements subject to of conclusion of the agreement because
uphold the application of section 24 in
suspensive conditions. it has not yet given transfer and is not
the current circumstances, would “bring
all sales of immovable property subject
obliged to do so until payment is received.
to suspensive conditions within the
However, section 24(1) of the Act is not ambit of section 24(1)” and that “sellers of
limited to cases where payment is required immovable property might be liable to pay
to be made before transfer. income tax on amounts the recovery of
which was uncertain and in circumstances
It includes cases where payment is to
where, if the worst happened and the
be made upon transfer – and as such,
transaction failed for any reason, they
cases where payment is to be made
might not be able to recover the tax they
“against transfer”.
had paid.”
The court in this case found that payment
However, the SCA referred to the case
was to be concurrent with transfer of
of Corondimas v Badat 1946 AD 548 for
ownership by registration. In the SCA’s
an answer.
words, the agreements provided for the
seller to effectively “pass ownership to The principle upheld in that decision was
the purchaser upon or after receipt of the effectively that “when a contract of sale
whole of the purchase price in terms of is subject to a true suspensive condition
section 24(1)”. ‘there exists no contract of sale unless and
until the condition is fulfilled’”.
The agreements had all become
unconditional in the same tax year that More specifically, the SCA stated that,
they were concluded, so there could be “If subject to a true suspensive condition
no question as to the non-application then, until the condition is fulfilled, on a
of section 24(1) on the basis that the proper interpretation of the section there
agreements were still subject to suspensive may well be no binding agreement that
conditions by the end of that tax year. ownership be passed upon or after receipt
of the amount payable to the taxpayer.”
However, what is of particular interest
here is the argument advanced by the The court therefore at the very least
taxpayer in respect of the application proposed some answer to the potentially
of section 24 of the Act to agreements hazardous consequences of the deeming
subject to suspensive conditions. The provision in section 24(1) of the Act.
concern was essentially that, so long as
Heinrich Louw
7 | TAX & EXCHANGE CONTROL ALERT 20 May 2021OUR TEAM
For more information about our Tax & Exchange Control practice and services in South Africa and Kenya, please contact:
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National Practice Head Private Equity Sector Head Director
Director Director T +27 (0)11 562 1425
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E petr.erasmus@cdhlegal.com E stephan.spamer@cdhlegal.com
Ben Strauss
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E ben.strauss@cdhlegal.com
TAX & EXCHANGE CONTROL | cliffedekkerhofmeyr.comOUR TEAM
For more information about our Tax & Exchange Control practice and services in South Africa and Kenya, please contact:
Louis Botha Louise Kotze Ursula Diale-Ali
Senior Associate Associate Associate Designate
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E varusha.moodaley@cdhlegal.com
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