Dear taxpayer,

Our Tax Helpdesk often gets queries around business losses and SARS’ treatment of them. And since we’ve just finished updating the Practical Tax Loose Leaf chapter on ring-fencing of assessed losses, I thought I’d share some of this information with you.

What is ring-fencing of assessed losses?
Many taxpayers declare and claim losses incurred from each and every type of activity imaginable against income received from other sources. However, not every activity is a trade. This means that losses from non-trading activities aren’t deductible.

In some instances private consumption (e.g. a hobby) is easily misrepresented as a trade. Ring-fencing isn’t defined in the Income Tax Act but it means that each individual or distinct source of income/loss is fenced separately. The loss is contained by the ring-fencing, thereby not allowing it to have any impact on other sources of income.

The tests applied to determine the true nature of a trade are very subjective and in the past this  placed SARS in a difficult position. SARS now has a more stringent “facts and circumstances” test as a means to uncover these artificially labelled trades. This is known as ring-fencing of assessed losses.

If you're not earning big bucks, you're probably off the hook
SARS usually targets only the higher income-earning individuals as wealthier individuals supposedly have more means to disguise hobbies as trades. Ring-fencing thus only applies to individuals earning R552 001 or more per year (before set-offs of losses from any other trade). This means that if your income is below this threshold, you don’t fall within the ambit of ring-fencing.

Checklist: Suspect trade list
The listed suspect trades, if practised by you or a relative are:
•    Sporting activities – including any form of sport, hunting, yachting, boat racing, water-skiing and scuba diving.
•    Dealing in collectibles – includes cars, stamps, coins, antiques, militaria, art and wine.
•    Rental of residential accommodation – unless at least 80% of residential accommodation is used by persons that aren’t your relatives for at least half of the year of assessment. Includes rental of holiday homes, bed and breakfast establishments, guesthouses and dwelling houses.
•    Rental of vehicles, aircraft or boats – unless at least 80% of the assets are used by persons that aren’t your relatives for at least half of the year of assessment.
•    Showing of animals in competitions – includes horses, dogs and cats.
•    Farming or animal breeding – other than on a fulltime basis. Includes weekend or casual farming and game farming.
•    Performing or creative arts – includes acting, singing, filmmaking, photography, writing, pottery
•    and carpentry.
•    Gambling or betting – includes trying your luck at a casino on a regular basis, card playing, lottery
•    purchases and sports betting.

Caution: If your tax claim is disallowed under the provisions of the ring-fencing act and you object, you should expect SARS to want to audit you.

There you go – some interesting facts to keep your brain in tip-top tax shape!

Fulvia Stoltz
Managing Editor, Practical Tax Loose Leaf

P.S. We spotted the typo in yesterday’s email too late – the effective date for the new dividends tax is 1 April 2012 – NOT 1 April 2011… Sorry about that!