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Two ways to ensure SARS doesn't ring-fence your tax losses

by , 24 February 2014
You probably know that SARS has the power to ring-fence your tax losses. What you may not know is there are two ways to avoid this. Here's what you must do.

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The Practical Tax Loose Leaf Service explains that SARS can apply ring-fencing to natural persons (i.e. individuals) as well as partners in a partnership.

The Loose Leaf Service goes on to say that ring-fencing means that SARS doesn't allow you to offset the losses you made in one trade (say, in your hairdressing business), against another trade (for example, your scrapbooking business).

The good news is you can avoid this from happening to your business.

Want to ensure SARS doesn't ring-fence your tax losses? Avoid these two things

#1: Don't sell your assessed losses

A tax loss is a valuable asset, but you can't sell it.

There have been countless cases where one company buys 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 get a tax benefit. The assessed losses are set aside, which means you can't use them.

#2: Don't use tax losses incorrectly when your company liquidates

If your business has no choice but to liquidate, 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.

But to qualify for the losses, your business must ensure that there's at least some trading in the company each year. Otherwise you're breaking one of the most important rules – that your business MUST be trading and generating income to be allowed to deduct the loss.

You must also avoid transactions that don't qualify as genuine trading, such as investment income. SARS is very aware of this and may disallow the losses.

Well there you have it. Avoiding these two things will help ensure SARS doesn't ring-fence your tax losses.

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