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Business profits down this year? Find out if your business qualifies for a tax loss

by , 25 February 2013
Last week, mining group Anglo American posted a pre-tax loss for 2012 of $239 million. According to the group, this tax loss is a result of all the platinum strikes South Africa mines have experienced lately. That's bad news for the company and is the reason why they're expected to cut 14 000 jobs in the next financial year. The good news, however, is that if something similar happens to your company, you can shrink your tax bill if you know how to offset tax losses against your future income.

"While every business strives to make a profit, a tax loss is, paradoxically, a valuable asset,' writes the South African Institute of Chartered Accountants on its website.

The reason? Because thanks to the Income Tax Act, you can offset your tax losses against future earnings.

That's great news if, like Anglo American, your business has been hit hard by less than profitable working situations this year.

Here's what you need to know about offsetting a tax loss as explained by The Practical Tax Loose Leaf Service below…

What is a tax loss?

'Let's say you spent R500 000 on advertising in 2012, but you only generated income of R350 000. The difference (R150 000) is the tax loss,' says tax specialist Andre van Staden in the The Practical Tax Loose Leaf Service. 'You can carry that forward to 2012, and set it off against your taxable income to lower your total taxable income – and shrink your tax bill.'

But to qualify for a tax loss, you need to answer 'Yes' to the following two questions.

Do you qualify for a tax loss?

Q1. Have you been carrying on a trade?
Q2. Did you earn an income during the year in which you traded?

'You must've earned some income during the trading year to claim a tax loss,' says Van Staden. In fact, continues van Staden 'to really cash in on the loss, make sure you carried on a trade both in the year you incurred the loss AS WELL AS in the year you're trying to deduct it. ' If your company doesn't trade in that the tax year, any assessed tax loss carried forward from the previous year is permanently forfeited and you lose the benefit.

What's more, you lose the benefit forever! So even if you do start trading in a later year, and you generate income from this trade, you won't be allowed to use the tax loss to shrink your tax bill.

Once you've identified that you have a tax loss and SARS will allow it based on answering 'yes' to the above questions, you can carry it forward.

If you need more information on assessed tax losses get your hands on the Practical Tax Loose Leaf. In the Practical Tax Loose Leaf you'll find a dedicated chapter on assessed tax losses. In it you'll discover:

  • 2 ways you can benefit from a tax loss
  • 4 situations where you CAN'T benefit from your losses
  • Don't let SARS ring-fence your losses and prevent you from using them. Here's how to prevent this happening to you
  • How to avoid these 3 tax loss traps
Get our Practical Tax Loose Leaf here...


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