It has become more common for an individual to engage in a business activity, trade, or place a residential property for rent, with the goal of generating income or supplementing their current remuneration if employed. The latter is in part due to the rising cost of living, retrenchment, or reduced working hours. However, entering a business activity does not necessarily lead to immediate revenue; there is a potential for both profit and loss.
If you generate profit from your “trading activity,” example – rental property income stream, then the rental profit forms part of your taxable income if you are employed. If you only generate income from the different. Losses arise when expenses incurred in trading activity exceed the revenue business activity and it falls within the taxable bracket, you will be subject to personal income tax (PIT).
In the case of losses incurred from trading activities, the applicability to tax is from the same activity. This results in an assessed loss.
The treatment of assessed loss can vary viz:
- If you earn other income, e.g., salary, interest, or pension, then any assessed loss you incur may deduct the loss from the taxable income. This would result in a reduced tax liability.
- If, however, there are no other income sources, then the assessed loss is rolled over to the following tax year. Note there is no ring fencing of loss applied as there is no other income source.
- Assessed loss is ring-fenced for future tax years.
What does ringfencing mean when we talk about assessed losses?
Assessed losses incurred from a business activity, is carried-forward to the following year. The accumulated loss is offset against profit derived from the same business activity in future years. Ring-fencing of losses is only applicable to individuals who undertake “a trading activity.”Ringfencing of assessed loss is not automatic. There are criteria that must be determined and met to apply the ringfencing of assessed loss.
In terms Income Tax Act, No 58 of 1962 (Act), the provisions of Section 20A comes into effect when assessed losses from a trade have been allowed in earlier years of assessment or may be applied in given year of assessment. Section 20A is applicable after consideration of sections 11(a) and 23(g) and provides a structure for determining whether or not a trade loss, such as a rental loss should be set off against other income, thereby reducing taxable income. By gaining a clear understanding of these provisions, you can make informed and strategic financial decisions that enhance your business operations and effectively manage tax implications. This proactive approach will empower you, leading to a more secure and prosperous financial future.