Ring-fencing of assessed losses : do the rules limit the set-off from capital gains?

• Jurisdiction: South Africa
• Author: Michael Rudnicki
• DOI: 10.10520/EJC-b6a25aa39
• Published date: 01 December 2017
• Date: 01 December 2017
• Record Number: btclq_v8_n4_a3
• Pages: 8-15
• Published By: Siber Ink

8© SIBER INK

Ring-fencing of Assessed

Losses:

DO THE RULES LIMIT THE SET-OFF FROM

CAPITAL GAINS?

MICHAEL RUDNICKI1

Abstract

This article examines the impact of section 20A of the Income Tax Act 58

of 1962 and considers whether the ring-fencing of assessed losses, limiting

them to the income from a trade carried on by a natural person in certain

circumstances as provided by that section, is restricted to income, as defined,

or whether a ring-fenced assessed loss could be set off against capital gains

for purposes of establishing taxable income.

The definition of ‘taxable income’ is a combination of two components:

(i) income less deductible expenditure and set-off (in terms of section 20 of

the Act) as allowed under Part I of Chapter II of the Act; and (ii) all amounts

included or deemed to fall within the definition of ‘taxable income’. The

provisions of section 20 apply to any balance of assessed loss and assessed

losses that are set off against income derived from the carrying on of a trade,

and in respect of taxpayers other than companies, from income not derived

from the carrying on of a trade. Accordingly, the provisions of section 20

are restricted to assessed-loss deductions against income as defined in the

circumstances provided for in section 20A.

The provisions of section 20A seek to restrict the set-off of assessed losses

of a trade to income derived by a natural person from the carrying on of that

trade. Two essential rules are applied: an assessed loss protraction rule and

a suspect business rule. Falling within these rules will limit the use of a trade

assessed loss.

The hypothesis in this article is the following: regardless of the limitation

applied by the provisions of section 20A to limit the application of assessed

losses from a particular trade to income from that trade, could the ring-

fenced assessed loss mechanically be set off against capital gains that are

deemed to fall within the definition of ‘taxable income’ by section 26A of the

Act? The definition of ‘taxable income’ is not clear as to whether a ring-fenced

loss is included in the definition and therefore deductible from capital gains.

The definition, though, suggests that following the deduction of admis-

sible expenses and set-off from income, a further deduction is permissible,

not against income, but against capital gains. It seems appropriate that the

National Treasury be requested to amend the definition of ‘taxable income’ to

accommodate an inclusion of section 20A ring-fenced losses as a deduction

from capital gains.

1

Director, Corporate Tax Practice, and Head: Private Equity Markets, KPMG.