DALL-E 3
In most cases, individuals can offset tax losses incurred in respect of one trade against income received from another trade, thereby reducing their overall tax liability.
Let’s explain using the following example: You earn an income from properties that you rent out, as well as earning a salary from your full-time employment. The expenses from your rental property are greater than the profit it generates (so you are basically losing money). If you can offset the loss related to your rental income, against your salaried income, you can lower the income that SARS will tax.
However in some cases, SARS will look very closely at these losses (that very expensive hobby that could theoretically generate profit, but really only in your dreams…). In these cases, SARS can ring-fence a tax loss.
What does ring-fencing a tax loss mean?
Ring-fencing a loss means that the loss can only be set off against income from the same trade the following tax year. Ring-fencing is intended to prevent individuals using their ‘losses’ as a way to gain tax benefits (that expensive hobby…).
‘Suspect trades’ and other requirements to ring-fence a tax loss
The first requirement is that the individual must fall within the highest income tax bracket. Currently, this means you need to earn a taxable income of more than R1,817,001 p/a.
The second requirement, known as the “suspect trade” requirement, is that the trade which created the tax loss is one of the following:
(i) practicing any sporting activity;
(ii) any dealing in collectables;
(iii) rental of residential accommodation (see proviso below);
(iv) rental of vehicles, aircraft or boats;
(v) any animal showing;
(vi) farming or animal breeding (see proviso below);
(vii) any form of performing or creative arts;
(viii) any form of gambling or betting; and
(ix) any form of acquisition or disposal of crypto assets.
However, a rental business will not be considered a suspect trade if at least 80% of the accommodation is used by people who are not your relatives. Similarly, farming will also not be a suspect trade if it’s your full-time job.
The third requirement is that the individual must have incurred a tax loss in respect of their suspect trade in at least three of the preceding five tax years.
But talk to SARS
In certain circumstances, the tax loss will not be ring-fenced, even if these requirements are met. If you can prove to SARS that the trade constitutes a business from which there is a reasonable prospect of deriving taxable income (not including CGT), within a reasonable period of time, SARS can agree not to ring-fence the loss.
Tax Tuesday
Being tax efficient is an important part of great financial management. In this blog, a group of South African tax experts at AJM Tax share their tips and explanations on tax issues. Learn everything you need to know about tax, from deductions you never knew about to retirement savings and capital gains. The first Tuesday of every month is Tax Tuesday.
