Page 410 - SAIT Compendium 2016 Volume2

IN 33 (4) Income Tax acT: InTeRPReTaTIon noTes IN 34 that year – would not be permitted to carry forward its balance of assessed loss from year one. Yet it would be permitted
to carry forward its year two assessed loss to year three if it derived a pre-tax pro t in year three.
4.2.2 The argument against the ‘income from trade’ requirement
Those who argue against the existence of the ‘income from trade’ requirement seem to rely mainly on the irrationality of the requirement from a policy perspective. They point to the fact that in the case of section 11(a) it is suf cient for a taxpayer to secure a deduction if the purpose of the expenditure is to produce income, and that income need not be derived in the same year of assessment (Sub-Nigel Ltd v CIR*). They also cite ITC 777† as authority for their interpretation that no income from trade is required. In that case a property owning company derived no income despite attempts to let its property. It was held that the company was entitled to carry forward its assessed loss. The court found that an unsuccessful endeavour to let constitutes trading even if no expenditure is outlaid. The question whether it was necessary to derive some income from trade before set-off can occur was not decided as this issue was not contested by the Commissioner. The use of this case as authority on this point is therefore questionable.
The crux of the argument, however, is that a company should be able to strike a balance even if its ‘income so derived’ (that is, tax pro t or loss) is nil. Support for this view can be found in the dictum of Schreiner ACJ in CIR v Louis Zinn Organization (Pty) Ltd‡ in which it was accepted that a set-off could take place when an assessed loss was incurred in the current year (see 4.1.1).
5. SARS’s view
SARS is of the view that section 20 contains a trade requirement and an income from trade requirement. Both these requirements must be satis ed before an assessed loss may be carried forward. SARS does, however, accept that this may have some unintended results.
In dealing with the problem SARS will accept that as long as the company has proved that a trade has been carried on during the current year of assessment, the company will be entitled to set off its balance of assessed loss from the preceding year, notwithstanding the fact that income may not have accrued from the carrying on of that trade. This concession is limited to cases in which it is clear that trade has been carried on. SARS will apply an objective test in order to determine that a trade has in fact been carried on. It will not be suf cient that there was a mere intention to trade or some preparatory activities. The fact that no income was earned during the year of assessment must be incidental or result from the nature of the trade carried on by the company.
Example – Carry-forward of an assessed loss when trade carried on but no income derived from trade
Facts:
Pecan Nut (Pty) Ltd was formed on 1 March 2009 with a February year-end for the purpose of operating a pecan nut farm. On 1 April 2009 it acquired a suitable piece of land and began planting small pecan nut trees during the months that followed. It was expected that the trees would only be ready for harvesting in four years’ time. During the 2010 to 2013 years of assessment the company derived no income although it incurred considerable expenditure in each of these years in cultivating the nut trees. During the 2014 year of assessment the company started harvesting nuts and sold them to a number of retail outlets.
Result:
Despite the fact that the company derived no income from trade during the 2010 to 2013 years of assessment, SARS will permit the company to carry forward its 2010 to 2013 assessed losses and set them off against the income derived in the 2014 year of assessment. The reason for the failure to derive any income during the years in question clearly stems from the nature of the company’s trade.
Although SARS is prepared to accept that the absence of income from trade (that is, gross income less exempt income) should not in all cases prevent the set-off of a balance of assessed loss, a company that derives no income from trade will have to discharge the onus that it did in fact trade during the current year. The absence of income from trade may well indicate that the company did not trade during the year in question.
6. Conclusion
While the views of SARS as contained in this Note provide direction in interpreting the legislation, each case will be considered on its merits in deciding whether a company has commenced or carried on a trade and much will depend upon the nature and the extent of the company’s activities. Cognisance should be taken of the view expressed in 5 when a company has clearly carried on a trade during the current year of assessment but has not derived any trade income during that year.
Income Tax Interpretation Note 34
Exemption from Income Tax: Remuneration derived by a person as an of cer or crew member of a ship
DATE: ACT: SECTION:
SUBJECT:
12 January 2006
INCOME TAX ACT 58 OF 1962 (‘the Act’)
Section 10 (1) (o) (i) of the Act, de nition of ‘remuneration’, paragraph 1 of the Fourth Schedule to the Act
Exemption from Income Tax: Remuneration derived by a person as an of cer or crew member of a ship
* 1948 (4) SA 580 (a), 15 SATC 381.
† (1953) 19 SATC 320 (t).
‡ 1958 (4) SA 477 (a), 22 SATC 85 at 95.
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