Under normal circumstances SARS will allow a taxpayer to carry forward the previous tax year’s assessed loss and set it off against the current tax year’s taxable income. However, there are certain circumstances under which SARS will not allow a taxpayer to carry forward the previous year’s assessed loss and the assessed loss will be lost or set off against future taxable income as well.
If the following two requirements are not met, SARS may not allow a business to carry forward its assessed loss to the current tax year:
Requirement 1: Carrying on a trade during the current year of assessment (the “trade” requirement)
The onus rests on the company/close corporation to prove to SARS that it was indeed trading during the current tax year. In deciding whether the taxpayer carried on a trade, SARS will take into account, amongst others, the following factors as they apply to the taxpayer’s specific business:
- The amount and type of expenses incurred during the tax year.
- The extent of the business activities.
- The nature of its general business activities.
- Whether the business activities were actively pursued.
- The number of transactions entered into during the tax year.
The following aspects are not necessarily enough to prove that a trade has been carried on:
- An intention to trade in the future
- Activities to prepare for future trading
- Holding meetings
- Preparing financial statements
Requirement 2: Earning income from trading (the “income from trade” requirement)
A company/close corporation may indeed have traded (and incurred expenses) during a tax year, but the related income will only be realised in the following or a later tax year due to the type of industry in which the business operates. Once again, the onus rests on the business to prove to SARS that it was actually trading in the current tax year despite the fact that no income was earned.
SARS acknowledges that it is possible that a business may have carried on a trade without earning an income in the same tax year. Take a property rental company for instance. The company could have been actively advertising and marketing available rental properties without finding any suitable tenants. This would result in a loss for the tax year as expenses were incurred but no income earned in the same period. In this case it is clear that a trade was carried on and SARS should allow the set off of an assessed loss in the current tax year. However, SARS will only consider allowing the set off of the assessed loss if:
- It was incidental that no income was earned during the current tax year despite the fact that the business was actively trading; or
- No income was earned during the current tax year as a result of the business cycle or nature of the trade in which the business operates.
As can be seen from the above discussion, the deduction of assessed losses is a grey area. The onus rests on the business to prove to the satisfaction of SARS that it meets the “trade” and “income from trade” requirements as set out above. SARS will assess each individual business based on its unique facts and circumstances, taking into account the above-mentioned factors to determine if the business will be allowed to carry forward its assessed loss.
This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)