Page 408 - SAIT Compendium 2016 Volume2

IN 33 (4) Income Tax acT: InTeRPReTaTIon noTes IN 33 (4)
Moneylending company in liquidation
In ITC 1751* a moneylending company was placed in liquidation but continued to collect money from persons to whom money had been advanced and to repay monies to persons from whom it had borrowed money for a decade after date of liquidation. The court permitted the set-off of the balance of assessed loss against post-liquidation interest income. The case shows that the activities undertaken by a company after it has been placed in liquidation can constitute a trade for income tax purposes. This, however, remains a question of fact.
Trade v realisation
In Robin Consolidated Industries Ltd v CIR† a company in liquidation derived income only from two isolated sales during the 1988 year of assessment against which it sought to set off its balance of assessed loss. The court refused to allow the set- off, drawing a distinction between trade and realisation. It was held that they are normally viewed as different, sometimes even opposed concepts. The principle to be drawn from this case is that isolated sales made by a company in liquidation on terms not normally adopted, and in a manner that eliminates risk, will not constitute income from trade. The case must not, however, be seen as establishing a general principle that a company in liquidation can never conduct trading activities.
4.1.10 Section 103(2)
A company can fail to meet the ‘trade’ requirement in section 20(1)(a) if the anti-avoidance provisions of section 103(2) are applied to any tainted income introduced into the company following a change in shareholding. In New Urban Properties Ltd v SIR‡ a land-dealing company was hopelessly insolvent and had accumulated a large assessed loss during the year ending 30 June 1958. From 1 July 1958 to 31 December 1958 the company was dormant.
On 1 January 1959 the company underwent a change of shareholding and income was diverted to the company for the purpose of using its assessed loss. The court refused to allow the set-off of the balance of assessed loss against the tainted income. The result was that the company forfeited its balance of assessed loss as it had no other trade with which to accomplish a set-off. Beyers JA stated the following:§
‘According to both decisions [CIR v Louis Zinn Organization (Pty) Ltd 1958 (4) SA 477 (a), 22 SATC 85, and SA Bazaars supra] subsection (3)¶ envisages a continuity in setting off an assessed loss in every year succeeding the year in which it was originally incurred, so that in each succeeding year a balance can be struck to the satisfaction of the Secretary which can then be carried forward from year to year until it is exhausted; if, for any reason, the assessed loss cannot be so set off and balanced in any particular year, there is then no ‘balance of assessed loss’ for that year which (viewed from that year of assessment) can be carried forward to the succeeding year, or (viewed from the succeeding year of assessment) there is no ‘balance of assessed loss which has been carried forward from the preceding year of assessment;’ in other words, the essential continuity has been fatally interrupted.’
4.2 The ‘income from trade’ requirement
For many years a debate has raged around whether a company that has traded during the current year but has derived no income from trade in that year will be entitled to set off its balance of assessed loss from the preceding year. Within this debate there is a further question on what is meant by the word ‘income’. Does it mean income in the de ned sense of gross income less exempt income, or income in the sense of a taxable pro t? To date these issues have still not been nally resolved.
4.2.1 The argument in favour of the ‘income from trade’ requirement
The wording of section 20
Those who argue in favour of the ‘income from trade’ requirement point to the wording of section 20(1) which requires that an assessed loss be ‘set off against the income so derived’. They argue that if there is no income then no set-off can be achieved. They also argue that section 20(2A) recognises the requirement because it extends the ‘income from trade’ requirement to include non-trade income in the case of persons other than companies.
Case law supporting the ‘income from trade’ requirement
In ITC 664** a company had traded up to 1929 at which point it had an assessed loss. From 1929 to 1945, the company did not trade nor derive any income. The Commissioner refused to allow the assessed loss to be carried forward during the years in question. On appeal, the Commissioner’s decision was upheld. Ingram CJ stated the following:††
‘The next question to be determined is what will be the position if there is no income in the next succeeding year. Here it is important to note that the section operates by way of set-off, i.e., the apposition of one amount against the other. It does not envisage the addition of the ‘balance of assessed loss’ to a loss on the year’s trading or its accumulation therewith. Section 11(1) provides that there shall be set off against the income the amounts permitted under sub-section (3). It follows, therefore, that in any given year there must be some income, i.e., an amount received in terms of section 7, against which the set-off can operate. Further, the income must be derived from trade.’
The income from trade requirement was also recognised in ITC 1679.‡‡ In that case the appellant, a close corporation, carried on business as a travel consultancy. At the end of the 1994 year of assessment it had an assessed loss. In the 1995 year it had interest income of R4 708 but no trade income, and had incurred expenditure of R36 006. It was held that a set-off of its balance of assessed loss was not permissible. The court found it unnecessary to decide whether the appellant had traded. It held that section 20(1) contains two requirements to accomplish a set-off, namely –
* (2002) 65 SATC 294 (c).
† [1997] 2 All SA 195 (a), 59 SATC 199.
‡ 1966 (1) SA 217 (a), 27 SATC 175.
§ At SATC 183.
¶ Section 11(3) of the Income Tax Act No. 31 of 1941, the equivalent of section 20(1)(a). ** (1948) 16 SATC 125 (U).
†† At 126/7.
‡‡ (1999) 62 SATC 294 (o).
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