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Assessed losses

TRoos_A4Every now and then the term “assessed loss” comes up, whether in a newspaper article, a discussion with a tax practitioner or during an informal talk with another person. But what do the words “assessed loss” actually mean?
This article will deal with assessed losses and the tax treatment thereof as applicable to taxpayers who are natural persons as defined in the Act.

What is an assessed loss?

An assessed loss arises when tax-deductible expenses exceed gross income for tax purposes. If SARS issues an assessment that contains the words “assessed loss” instead of “taxable income”, it means no income tax will be payable. The assessed loss is carried forward to the next tax year and set off against any taxable income which might have been earned.

Tax treatment of an assessed loss

The following example shows the calculation of taxable income and an assessed loss, and the subsequent tax treatment of the assessed loss. Please note that the amounts and the tax rate of 20% used below are fictional and used only to simplify the calculations.

Tax year 1:

Taxable income
R
Assessed loss
R
Gross income for tax purposes 1 000 1 000
Less: Tax-deductable expenses (e.g. retirement annuity contributions, medical expenses) (200) (1300)
Taxable income / (Assessed loss) 800 (300)
Income tax on taxable income @ 20% 160
Assessed loss carried forward to tax year 2 (300)

Tax year 2:

Taxable income
R
Gross income for tax purposes 1 200
Less: Tax-deductable expenses (e.g. retirement annuity contributions, medical expenses) (400)
Income before taking into account assessed loss (300)
Taxable income 500
Income tax on taxable income @ 20% 100

As can be seen from the example above, the assessed loss of R300 for tax year 1 is carried forward to tax year 2 and deducted from the taxable income for tax year 2 before calculating the income tax due for tax year 2.

Tax-deductable expenses disallowed

It is important to note that certain tax-deductable expenses are not allowed if deducting them will result in an assessed loss. A discussion of the disallowed expenses for purposes of calculating an assessed loss falls outside the scope of this article. Please contact your tax practitioner for more information.

Ring-fencing of assessed losses

The effect of ring-fencing of assessed losses is that an assessed loss from one type of trade cannot be deducted from the taxable income of a different trade to reduce a taxpayer’s overall income tax liability.

Assessed losses arising as a result of the following trades practised by the taxpayer or any relative of the taxpayer, may not be set off against any other taxable income earned by the taxpayer during that same tax year:

  • Practising a sport;
  • Trading in collectibles;
  • Rental of residential accommodation (subject to certain exemptions – please contact your tax practitioner for more information);
  • Rental of vehicles, aircraft or boats (subject to certain exemptions – please contact your tax practitioner for more information);
  • Animal showing;
  • Farming or animal breeding (subject to certain exemptions – please contact your tax practitioner for more information);
  • Performing or creative arts;
  • Gambling/betting.

To whom does ring-fencing apply?

Ring-fencing only applies to taxpayers who are natural persons and whose taxable income, before taking into account the effect of assessed losses, will be taxed at the maximum tax rate.

The ring-fencing provisions as set out above are not applicable to assessed losses incurred by close corporations, companies and trusts.

As can be seen from the above article, the nature of an assessed loss, i.e. how it was created, will determine the tax deductability of the assessed loss against future taxable income.

This article is a general information sheet and should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice.

Reference list:

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