If you're not sure what 'ring-fencing of assessed losses' means, don't fret. The Practical Tax Loose Leaf Service has got you covered.
Here's what you need to know about ring-fencing of assessed losses
Many taxpayers declare and claim losses incurred from each and every type of activity imaginable against income received from other sources.
BUT, not every activity is a trade.
This means that losses from non-trading activities aren't deductible. In some instances, private consumption (for example, a hobby) can be easily misrepresented as a trade.
And this is where ring-fencing comes in.
The Loose Leaf Service explains that 'ring-fencing means that each individual or distinct source of income or loss is fenced separately. The loss is contained by the ring-fencing, thereby not allowing it to have any impact on other sources of income.'
The tests applied to determine the true nature of a trade are very subjective and in the past this placed SARS in a difficult position.
But SARS now has a more stringent 'facts and circumstances' test as a means to uncover these artificially labelled trades.
This is known as ring-fencing of assessed losses.
According to the Loose Leaf Service, SARS decided to target only the higher income-earning individuals since wealthy people 'supposedly' have more means to disguise hobbies as trades.
Who's affected by ring fencing?
According to the South African Institute of Chartered Accountants (SAICA), ring-fencing can only be applied if the taxpayer is a natural person whose taxable income (before the deduction of any assessed losses) is subject to the maximum marginal rate of tax. And he or she either had an assessed loss in at least three out of the last five tax years or the assessed loss arises from one of the suspect trades listed in section 20A(2)(b) of the ITA.
The suspect trades listed in section 20A (2) (b) are;
Basically, if your income is below the set threshold, you don't fall within the realm of ring fencing. SARS normally adjusts tax tables annually. You can log on to their website to find out if your income falls within ring fencing rules.
Now that you know the meaning of ring-fencing of assessed losses, make sure you comply.