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Three tax loss traps your business must avoid at all costs

by , 29 August 2014
No business owner feels happy about the fact that their business made a loss.

And while this tax loss can be incredibly useful as a tax benefit, it's very easy to fall into a tax loss trap that can land you in serious trouble with SARS.

To ensure you don't end up on the wrong side of SARS, you must avoid these three tax loss traps...

 

Trap #1: Selling your assessed losses

 
A tax loss is a valuable asset, but you can't sell it.
 
There have been countless cases where one company purchases another smaller company, with the assessed losses being an important motivation for the purchase. SARS will pick it up if you transfer the assessed loss to obtain a tax benefit. The assessed loss is set aside, which means you can't use it. 
 
Trap #2: Using tax losses incorrectly when your company liquidates
 
If your business has no choice but to liquidate, you'll be glad to know you can use assessed losses to take some tax pressure off you! By deducting your losses, your total taxable income at the time of liquidation will be lower. 
 
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Avoid costly tax issues
 
 
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Trap #3: Off-setting foreign losses against your local trade 
 
Our Tax Act doesn't give you much help on this one. It doesn't provide any guidelines to help you decide whether or not you carried out trade outside the Republic. 
 
So what happens when a taxpayer carries on a trade outside of South Africa and tries to offset the losses against their local trade/income?
 
It depends on the nature of the trade you conduct inside SA. If you're earning any foreign income through the use of your skills within South Africa, then the source of the trade is in South Africa. In this case, you can offset trade losses against your other income, as it's actually a local trade despite you earning 'foreign income'. 
 
But if this isn't the case, you can't offset the losses at all.
 
Ensure your company avoids these three tax loss traps so you don't incur SARS penalties.
 

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