Voorlopige belasting: Onderskattingsboetes
June 21, 2018

Ring-fencing of losses (Section 20A) for natural persons

Section 20A came into effect on 1 March 2004 and this section deals with the ring-fencing provisions that prevent natural persons from reducing their taxable income by using losses from secondary trade.

Section 20A does not replace sections 11(a) and 23(g) of the Income Tax Act. All expenses that do not qualify in terms of section 11(a) or expenses that are denied as a deduction in terms of section 23(g), will be lost permanently. Thus, Article 20A contrasts with sections 11(a) and 23(g) since expenses are not permanently disallowed under Article 20A but rather ring-fenced by allowing them as a deduction against future taxable income of the primary industry.

Section 20A(2) lays down the following requirements according to which assessed losses will be ring-fenced:

  1. If a taxpayer is taxed at the maximum tax rate, before considering any assessed losses and balances of determined losses in the previous years of assessment, the following points 2 to 4 should be considered.
  1. Section 20A(2) requires the “3-out-of-5-year” test to be applied for two categories, namely game farming activities and trading in “suspicious” activities –

    2.1 Assessed losses resulting from game farming activities in 3 of the 5 preceding years may possibly be ring-fenced.
    2.2 Section 20A(2)(b) provides a list of “suspicious activities” and if assessed losses are generated by one of the following activities for at least 3 of the preceding 5 years, such losses may possibly be ring-fenced:
    – any sports activities pursued by the taxpayer;
    – any trade in collectables;
    – letting of residential property, unless at least 80% of the accommodation is used by persons not related to the taxpayer for at least half of the year of assessment;
    – letting of vehicles, aircraft or boats as defined in the Eighth Annexure, unless at least 80% of the vehicles, aircraft or boats are used by non-related persons for at least half of the year of assessment;
    – putting animals on show by the taxpayer;
    – farming or stud farming, unless the taxpayer is carrying on these activities on a full-time basis;
    – any form of fine arts or performing arts carried on by the taxpayer;
    -any form of gambling or betting carried on by the taxpayer.

  1. The above stipulations are not applicable in cases where a loss is incurred for the year of assessment in an industry that has a reasonable chance of generating a taxable income (excluding capital gain) within a reasonable period and also complies with certain criteria as listed in section 20A(3).
  1. Although ring-fencing can be avoided under point 3, losses may still be ring-fenced if they are incurred for at least 6 of the preceding 10 years. The onus then rests on the taxpayer to convince SARS that business is carried on with a reasonable prospect of generating taxable income in a reasonable period.