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IN 33 (4) Income Tax acT: InTeRPReTaTIon noTes IN 33 (4)
INTERPRETATION NOTE: NO. 33 (Issue 4)
Assessed Losses: Companies: The ‘Trade’ and ‘Income from Trade’ Requirements
DATE: ACT: SECTION: SUBJECT:
CONTENTS
Preamble
1. Purpose
2 Background
3. The law
4. Application of the law
4.1 The ‘trade’ requirement
4.1.1 The meaning of ‘assessed loss’ and ‘balance of assessed loss 4.1.2 The need to carry on trade during the current year of assessment 4.1.3 Non-trade income
4.1.4 Amounts disguised as trade income
4.1.5 The extent of effort or money expended
4.1.6 The ‘active step’ requirement
4.1.7 When does trade commence?
4.1.8 Deduction of pre-trade expenditure and losses under section 11A 4.1.9 When does trade cease?
4.1.10 Section 103(2)
4.2 The ‘income from trade’ requirement
4.2.1 The argument in favour of the ‘income from trade’ requirement 4.2.2 The argument against the ‘income from trade’ requirement
5. SARS’s view
6. Conclusion
Preamble
In this Note unless the context indicates otherwise –
• ‘section’ means a section of the Act;
• ‘the Act’ means the Income Tax Act 58 of 1962; and
• any word or expression bears the meaning ascribed to it in the Act.
1. Purpose
This Note clari es when a company may forfeit its right to carry forward its assessed loss from the preceding year of assessment as a result of it –
• not carrying on a trade during the current year of assessment, or
• having carried on a trade during the current year of assessment, but not deriving any income from trade during that
year of assessment.
2. Background
Under section 20(1)(a) a company that does not carry on a trade during a year of assessment forfeits the right to carry forward its assessed loss from the immediately preceding year of assessment (the ‘trade’ requirement). A further question arises whether a company that has traded during the current year but has derived no income from trade during that year is denied the opportunity to carry forward its assessed loss from the preceding year (the ‘income from trade’ requirement).
3. The law
Section 20(1)(a)
Section 20(2) – De nition of ‘assessed loss’
22 July 2014
INCOME TAX ACT 58 OF 1962
Section 20(1)(a)
Assessed Losses: Companies: The ‘Trade’ and ‘Income from Trade’ Requirements
20. Set-off of assessed losses.—(1) For the purpose of determining the taxable income derived by any person from carrying on any trade, there shall, subject to section 20A, be set off against the income so derived by such person— (a) any balance of assessed loss incurred by the taxpayer in any previous year which has been carried forward from
the preceding year of assessment;
(2) For the purposes of this section ‘assessed loss’ means any amount by which the deductions admissible under section 11 exceeded the income in respect of which they are so admissible.
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