Dear reader

This has been one tough week, and not just because of the sudden chill in the weather! Tomorrow is the deadline for submission of tax returns. Being stuck at work late is no excuse! SARS has extended its office and call centre hours to 6pm and 8pm respectively, to help you get your taxes sorted out on time.

SARS said “no!”
Alton called me this week, to raise a concern. “I’ve been getting a lot of queries around the issue of rental losses and ring-fencing,” he said. “And there are a lot of very unhappy taxpayers, who’re not getting allowances from SARS, because they haven’t understood the principle of rental losses and ring-fencing”.

You decide to buy a small flat in town, as a second property, which you plan to rent out. You buy the flat as an investment (after all, the rent will cover some of the bond repayments, and one day, you’ll sell it for more than you paid to get it!).
You’re hoping to claim tax deductions and allowances on the flat, since you’ll need to spend some money fixing it up, and finding a tenant. But will your investment become a financial liability and a red-flag for the tax auditor?

Renting out a property is actually trade
SARS regards this sort of property leasing as trading (since the rent that your tenant will pay you is an income). Which means you’ll be taxed on the rental income. The good news is that you will be allowed to claim income tax deductions for the interest on the bond, as well as rates and taxes, and also on any repair costs. You can also claim any travelling costs, advertising costs, bank charges etc associated with the renting out of the flat. You can’t claim deductions on the bond repayments however, as these have a capital nature.

If your rental income tax deductions amount to more than the rental income, you have a tax loss, which can be offset against other income (your salary, for example). However, if you fall into the top marginal tax bracket (i.e. for the tax year ending 28 February 2010, an income of R52 5001 and above, which is taxed at 40%), then SARS may ring-fence the loss as a suspect trade. Horse breeding is an example of a suspect trade, as it’s very easy to create a horse breeding business that deliberately makes tax losses, to make tax profits.

What is ring-fencing?
But back to ring fencing- what exactly is it? Basically, it’s an anti-avoidance measure put in place by SARS, to prevent you from claiming big losses from SARS, all at once. It also makes sure that you are not trying to claim these losses on your secondary business ventures (your accounting-on-the side business, for example).

Why would SARS ring-fence your losses?
SARS will ring-fence your losses to make sure that you are not trying to wangle your way out of taxes by claiming rental losses from your trade (or your rental), to get tax allowances. Especially if this trade is not your primary employment. In this case, you’ll need to prove that you’re not carrying out any suspect trading outside of your actual job.

There is an escape
There’s a way out of ring fencing. There’s an escape clause, which tests your business (or your rental) to determine whether it’s likely to make taxable profits in the next few years, or not. If you can prove your losses aren’t going to persist, you’ll be ring-fencing free!

Yes — rental income is a complicated matter, and with SARS cracking down on tax bad-guys, you can be sure it’s going to be a lot tougher on rental property owners. If you’re reading the Practical Tax Handbook, then you don’t need to stress — we’ve got all the bases covered!

Until next time,

Fulvia Becatti
Managing Editor, Practical tax Handbook and Practical Vat Handbook