Page 404 - SAIT Compendium 2016 Volume2

IN 33 (4) Income Tax acT: InTeRPReTaTIon noTes IN 33 (4) Section 1(1) – De nition of ‘trade’
4. Application of the law
4.1 The ‘trade’ requirement
4.1.1 The meaning of ‘assessed loss’ and ‘balance of assessed loss’
The term ‘assessed loss’ is de ned in section 20(2), and refers to the tax loss that arises in the current year of assessment after deducting the admissible deductions in section 11 from the income against which they are admissible. The de nition does not contain either a ‘trade’ or an ‘income from trade’ requirement, but the carrying on of a trade is generally a requirement for deductibility under section 11.
A ‘balance of assessed loss’ refers to the assessed loss that is brought forward from the preceding year of assessment. The methodology for determining a balance of assessed loss was described by Schreiner ACJ in CIR v Louis Zinn Organization (Pty) Ltd:*
‘Wherever there has been a trading loss in the tax year, or where there has been a balance of assessed loss brought forward from the previous year, there has to be a determination of the balance of assessed loss to be carried forward into the next year. There may have been a pro t in the tax year but not large enough to obliterate the balance of assessed loss carried over from the previous year. Then the new balance of assessed loss will be smaller than the previous one. If there has been a working loss in the tax year the balance to go forward will be increased. If there has been no previous balance the assessed loss in the tax year will be the balance of assessed loss carried forward. The point to keep in mind is that, although at the stage where it is to be used, i.e. when it is to be set off against a pro t, a balance of assessed loss looks back to the past, at the stage where it is being determined, i.e. when its amount is being calculated, it looks forward to the future when it will be used. At the determination stage it is being prepared for future use, and it has then no effect on the taxpayer’s liability in respect of the tax year for which the relative notice of assessment is issued.’
4.1.2 The need to carry on trade during the current year of assessment
Before a company can carry forward its assessed loss from the immediately preceding year of assessment (the ‘balance of assessed loss’), it must have carried on a trade during the current year of assessment. If it fails to do so, it will forfeit the right to carry forward its balance of assessed loss under section 20(1)(a). This principle was rmly entrenched in our law by the landmark case of SA Bazaars (Pty) Ltd v CIR.† In 1941 the appellant company closed down its general dealer’s business. From 1941 to 1947 it did not trade, but kept itself alive by maintaining a bank account, paying its annual duty and complying with the Companies Act and Income Tax Act applicable at the time. In 1948 the company resumed trading and sought to set off the assessed loss from earlier years. The court refused to allow the company to set off its assessed loss. Centlivres CJ stated the following:‡
‘The mere fact that it kept itself alive during that and subsequent periods does not mean that during those periods it was carrying on a trade. It is clear from the stated case that it closed down its business and as long as it kept its business closed it cannot be said to have been carrying on a trade, despite any intention it might have had to resume its trading activities at a future date.’
Although the ‘trade’ requirement may have been rmly established, dif culties still arise in determining whether a company’s activities constitute the carrying on of a trade. This can happen when –
• the nature of the activity itself does not fall within the meaning of ‘trade’ as de ned in section 1(1);
• the company’s activities have taken place before the commencement of trade;
• the company conducts non-trade activities after it has ceased trading; or
• the anti-avoidance provisions of section 103(2) apply.
4.1.3 Non-trade income
As pointed out in Silke on South African Income Tax –§
‘In spite of its wide meaning, the term ‘trade’ does not embrace all activities that might produce income, for example,
income in the form of interest, dividends, annuities or pensions.’
The watching over of investments does not constitute a trade.¶ The earning of interest on funds advanced by a holding
company to its subsidiary was held not to constitute the carrying on of a trade.** The de nition of ‘trade’ in section 1(1) includes the word ‘business’, and the issue frequently arises whether a company’s investing activities constitute a business of moneylending. If they do, the company would be able to meet the ‘trade’ requirement. The same would apply to a company carrying on share-dealing.†† As to what constitutes a moneylending business the following remarks of Nicholas AJA in Sentra-Oes Koöperatief Bpk v KBI are useful:‡‡
* 1958 (4) SA 477 (a), 22 SATC 85 at 95.
† 1952 (4) SA 505 (a), 18 SATC 240.
‡ At SATC 245.
§ A P de Koker & R C Williams Silke on South African Income Tax [online] (My LexisNexis: August 2013) in § 7.2. ¶ ITC 1275 (1978) 40 SATC 197 (c).
** ITC 496 (1941) 12 SATC 132(U)
†† ITC 1274 (1977) 40 SATC 185 (t).
‡‡ 1995 (3) SA 197 (a), 57 SATC 109 at 117.
‘trade’ includes every profession, trade, business, employment, calling, occupation or venture, including the letting of any property and the use of or the grant of permission to use any patent as de ned in the Patents Act or any design as de ned in the Designs Act or any trade mark as de ned in the Trade Marks Act or any copyright as de ned in the Copyright Act or any other property which is of a similar nature;
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