Page 407 - SAIT Compendium 2016 Volume2

IN 33 (4) Income Tax acT: InTeRPReTaTIon noTes IN 33 (4)
had commenced. The partnership had, however, acquired the land, prepared the construction plans and obtained the necessary nance.
In South Africa the absence of productive assets has been found to be an indicator of the absence of trading activity. In ITC 697 Price J stated:*
‘If a taxpayer has no asset with which he can trade then he cannot be trading.’
See also the Contour Engineering case cited in 4.1.4:†
‘What the evidence does clearly establish is that during 1988 the respondent had no premises, no equipment, no stock,
no staff and, save for book debts, no assets. This is clearly indicative of a company which is not trading.’
In the USA in the case of service businesses, it is generally required that persons must at least hold themselves out as
ready to provide services.
In Australia, one of the key requirements for the carrying on of a business is the level of commitment of the taxpayer.
In Esso Australia Resources Ltd v FC of T the following was stated:‡
‘In cases where it is necessary to discern between activity constituting the carrying on of a business and activity which
is preliminary to the carrying on or recommencement of a business it is the element of commitment that establishes the requisite nexus between the expenditure claimed to be deductible and the business said to be carried on for the purpose of gaining or producing assessable income: see Softwood Pulp and Paper Ltd v FC of T 76 ATC 4439 at 4450 per Menhennitt J; Inglis at ATC 4004; FLR 195-196 per Brennan J and at ATC 4008; FLR 201 per Davies J; Goodman Fielder Wattie Ltd v FC of T 91 ATC 4438 at 4448; (1991) 29 FCR 376 at 387 per Hill J; FC of T v Brand 95 ATC 4633 at 4649 per Tamberlin J.’
In the United Kingdom (UK) there is not much case law on when trading commences. But it would seem that a far stricter approach is taken in the UK than in the USA and Australia, and that as a general rule a company will only be regarded as trading if its doors are open for business. In J. & R. O’Kane & Co. v The CIR§ the court said that the act of keeping open a shop was essential to the carrying on of the business of a seller. And in Ransom v Higgs¶ the court emphasised the active nature of trading, namely, the need to be dealing with someone engaged in buying or selling activity or the provision of services.
SARS will assess each case on its merits in deciding whether a company has commenced the carrying on of a trade. Much will depend on the nature of the company’s activities.
4.1.8 Deduction of pre-trade expenditure and losses under section 11A
Section 11A provides a deduction in the year of assessment in which trade commences for qualifying pre-trade expenditure and losses. In other words, the relevant pre-trade expenses are not claimed in the year in which they are incurred but in the year in which trade commences. Despite the introduction of section 11A, the time when trade commences is of importance because pre-trade expenses qualifying under section 11A are ring-fenced against income from the particular trade to which they relate under section 11A(2) and can therefore not create or increase an assessed loss. For more details see Interpretation Note No. 51 (Issue 3) dated 22 July 2014 ‘Pre-trade Expenditure and Losses’.
4.1.9 When does trade cease?
Companies in liquidation
The question frequently arises whether a company will be entitled to use its balance of assessed loss once it has been placed in liquidation. In many cases the only income derived by such a company will be post-liquidation interest. Since this will usually not comprise ‘income from trade’ the focus switches to the company’s other activities (such as the collection of debts) in order to pass the trade test and achieve a set-off of the balance of assessed loss against the interest income. Companies in liquidation are frequently the target of offers of compromise under section 155 of the Companies Act No. 71 of 2008. It is in the interests of the new shareholders to keep the assessed loss alive, though even if the company passes the trade test it must still run the gauntlet of section 103(2).
The collection of debts
In Timberfellers (Pty) Ltd v CIR** the company had carried on the business of selling agricultural equipment under franchise agreements prior to its liquidation on 20 September 1982. As at 30 June 1983, its nancial year end, it had a large assessed loss. On 5 October 1983 the company was discharged from liquidation after a successful compromise was sanctioned under section 311 of the Companies Act, 1973. During the period 5 October 1983 to 30 June 1984 the company earned no income, had no employees, stock, franchises or xed assets of signi cance. Its sole activity consisted of collecting its pre-liquidation debts through a rm of attorneys and its accountant. Approximately R200 000 was collected from these pre-liquidation debts. The net proceeds were not used for any trading activities and were merely used to repay the shareholder’s loan account.
The Commissioner refused to allow the appellant to carry forward its assessed loss to 1984. The appellant argued that the collection of debts constituted a trade. The court held that the balance of assessed loss could not be set off. This case established the principle that the collection of debts by a company that has no intention of continuing to trade does not constitute trading. The decision in COT, SR v Pan African Roadways Ltd†† in which the collection of debts was held to constitute trading was distinguished on the facts.
* (1950) 17 SATC 93 (t) at 96
† At 456.
‡ 98 ATC 4768, (1998) 39 ATR 394 at 396. § 12 TC 303 (HL) at 341/2.
¶ [1974] 50 TC 1.
** 1994 (n), 59 SATC 153.
†† 1957 (2) SA 535 (SR), 21 SATC 236.
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