Page 492 - SAIT Compendium 2016 Volume2

IN 51 (3) Income Tax acT: InTeRPReTaTIon noTes IN 51 (3)
It is, therefore, possible for a taxpayer to carry forward an assessed loss and any pre-trade expenses from the same trade at the same time. The assessed loss brought forward would result from post-trade expenses, while the pre-trade expenses carried forward would arise from the limitation under section 11A(2).
Example 6 – Limitation of deduction of pre-trade expenses
Facts:
Pre-trade expenses
Income from trade
Deductible post-trade expenses
Result:
Income from trade
Less: Deductible post-trade expenses
Subtotal before deducting pre-trade expenses Less: Pre-trade expenses of R100 000 limited to Taxable income
Pre-trade expenses
Less: Pre-trade expenses deducted limited to Balance of pre-trade expenses carried forward
R
100 000 150 000 80 000
150 000 (80 000) 70 000 (70 000)
Nil
100 000 (70 000) 30 000
The balance of the pre-trade expenses of R30 000 will be carried forward and will be available for set-off against future taxable income from this trade.
4.6.2 Impact of assessed loss brought forward on ring-fencing
Any assessed loss brought forward from the previous year of assessment (referred to as any ‘balance of assessed loss’ in section 20) must be allocated between the various trades to which it relates in order for section 11A(2) to be applied. The deduction for pre-trade expenses relating to a particular trade is limited to the taxable income from that trade which remains after the set-off of any balance of assessed loss incurred in that trade.
Example 7 – Assessed loss brought forward
Facts:
References in this example to years 1, 5 and 6 are to the years of assessment ending on 28 February 20x1, 20x5 and 20x6 respectively. Company Y carries on two trades, A and B. Trade B commenced during year 1 while Trade A commenced during year 5. At the end of year 5 the company had assessed losses carried forward of R50 000 from Trade A and R10 000 from Trade B. The company had unclaimed pre-trade expenses of R40 000 from Trade A at the end of year 5. During year 6 the company had income of R100 000 from Trade A and R200 000 from Trade B. Allowable post-trade expenses incurred during year 6 for Trades A and B amounted to R20 000 and R50 000 respectively.
Result:
Company Y’s taxable income for year 6 is determined as follows:
Trade A Trade B
Income
Less: Allowable post-trade expenses
Assessed loss brought forward
Subtotal
Pre-trade expenses brought forward
Less: Pre-trade expenses deducted in current year Balance of pre-trade expenses carried forward Taxable income
40 000 (30 000) 10 000
100 000 (20 000) (50 000) 30 000
(30 000)
Nil
200 000 (50 000) (10 000)
140 000
140 000
Under section 11A(2) the balance of pre-trade expenses of R10 000 from Trade A may not be set off against the taxable income of R140 000 from Trade B.
4.6.3 Claiming of pre-trade expenses limited by section 11A(2)
The mechanism for claiming pre-trade expenses limited under section 11A(2) is contained in section 11A(1). The opening words of section 11A(1) refer to the determination of taxable income derived during any year of assessment in which the trade is being carried on. The words ‘any year of assessment’ could be either the year of assessment in which trade commences or any subsequent year of assessment.
4.7 Repeal of section 11(bA)
Before the deletion of section 11(bA), any interest and related nance charges actually incurred by the taxpayer on any loan, advance or credit used by the taxpayer for the acquisition, installation, erection or construction of certain assets to be used for purposes of the taxpayer’s trade, were deductible under section 11(bA) in full during the year in which the asset was brought into use for the rst time.
Before the introduction of section 11A, section 11(bA) served a purpose in that it allowed pre-production interest and related nance charges to be claimed as a deduction in the year of assessment in which the qualifying assets were
484 saIT comPendIum oF Tax LegIsLaTIon VoLume 2