Page 487 - SAIT Compendium 2016 Volume2

IN 51 (3) Income Tax acT: InTeRPReTaTIon noTes IN 51 (3)
Effect of section 11A
Under section 11A pre-trade expenses which would have quali ed under section 11 [excluding section 11(x)], 11B, 11D or 24J but for the trade requirement in those provisions, are deductible in the year of assessment in which trade commences, subject to certain requirements, irrespective of when these expenses were incurred, but subject to section 23H.*
3. The law
Section 11A
11A. Deductions in respect of expenditure and losses incurred prior to commencement of trade.—(1) For purposes of determining the taxable income derived during any year of assessment by a person from carrying on any trade, there shall be allowed as a deduction from the income so derived, any expenditure and losses—
(a) actually incurred by that person prior to the commencement of and in preparation for carrying on that trade;
(b) which would have been allowed as a deduction in terms of section 11 (other than section 11(x)), 11B, 11D or 24J, had the expenditure or losses been incurred after that person commenced carrying on that trade; and
(c) which were not allowed as a deduction in that year or any previous year of assessment.
(2) So much of the expenditure and losses contemplated in subsection (1) as exceeds the income derived during the year of assessment from carrying on that trade after deduction of any amounts allowable in that year of assessment in terms of any other provision of this Act, shall not be set off against any income of that person which is derived otherwise than from carrying on that trade, notwithstanding section 20(1)(b).
Commencement date
Section 11A applies to any pre-trade expenses actually incurred by a taxpayer during any year of assessment ending on or after 1 January 2004.
4. Application of the law
4.1 Overview of section 11A(1)
A pre-trade expense quali es as a deduction against the income from the trade to which it relates subject to the following four key requirements contained in section 11A(1):
• First, the trade, in respect of which the pre-trade expense was incurred, must have been commenced by the taxpayer
[opening words of section 11A(1)].
• Secondly, the pre-trade expense must have been actually incurred before the commencement of and in preparation for
carrying on that trade [section 11A(1)(a)];
• Thirdly, had the pre-trade expense been incurred after the commencement of the trade to which it relates, it would have
been allowed as a deduction under section 11 [other than section 11(x)], 11B, 11D or 24J [section 11A(1)(b)].
• Fourthly, the pre-trade expense must not have been allowed as a deduction in that year or any previous year of
assessment [section 11A(1)(c)].
Once these requirements have been met, the pre-trade expense will be allowed as a deduction under section 11A(1) in the year of assessment in which the trade to which it relates commences, subject to the ring-fencing requirements of section 11A(2). Apart from triggering a deduction under section 11A(1), the time when trade commences is important because, barring some exceptions,† any post-trade expenses will not be ring-fenced against the income to which they relate.
4.2 Deduction of pre-trade expenses after trade has commenced [section 11A(1)]
4.2.1 Commencement of trade
There is not much direct precedent on exactly when trade commences in South African case law. Nevertheless, some principles can be drawn from the few cases that are available. In ITC 777‡ it was held that the mere intention to let property does not constitute the carrying on of a trade. As the company had endeavoured to let the property, it was held that the company did carry on a trade. In ITC 1476 Kirk-Cohen J stated the following: §
‘In my view the carrying on of a trade involves an active step – something far more than merely watching over existing investments which are not, and are not intended or expected to be, income producing during the year in question.’
The active step must comprise more than the mere laying of plans. In C: SARS v Contour Engineering (Pty) Ltd, Eksteen AJ stated the following:¶
‘There is, however, a vast difference between the mere laying of plans for the respondent’s future, on the one hand, and the commencement of preparatory activities for a future venture, on the other . . ..’
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 the following:**
‘If a taxpayer has no asset with which he can trade then he cannot be trading.’
For an in-depth examination of this topic, see Interpretation Note No. 33 (Issue 4) dated 22 July 2014 ‘Assessed Losses: Companies: The ‘Trade’ and ‘Income from Trade’ Requirements’.††
* See section 23H(1)(a).
† The Act contains a number of other ring-fencing provisions such as those in paragraph (b) of the proviso to section 20(1), sections 20A 23A and 36 and paragraphs 8 and 11 of the First Schedule.
‡ (1953) 19 SATC 320 (t).
§ (1989) 52 SATC 141 (t) at 148. ¶ 1999 (e), 61 SATC 447 at 456. ** (1950) 17 SATC 93 (t) at 96. †† In 4.1.7.
saIT comPendIum oF Tax LegIsLaTIon VoLume 2 479