Page 636 - SAIT Compendium 2016 Volume2

IN 73 Income Tax acT: InTeRPReTaTIon noTes IN 73
‘any amount by which the deductions admissible under section 11 exceeded the income in respect of which
they are so admissible’.
Section 20 (1) (a) provides that for the purpose of determining the taxable income derived by any person from carrying on any trade, there will, subject to the ring-fencing provisions contained in section 20A, be set off against the income so derived by that person any balance of assessed loss incurred by that person in any previous year which has been carried forward from the preceding year of assessment.
Section 20 (1) (b) stipulates that any assessed loss incurred during the same year of assessment in carrying on any other trade either alone or in partnership with others, otherwise than as a member of a company the capital whereof is divided into shares, may be set off against income derived from carrying on any trade.
However, paragraph (b) of the proviso to section 20 (1) prohibits the set-off of any assessed loss incurred during the year or any balance of assessed loss incurred in any previous year of assessment in carrying on a trade outside South Africa against the amount derived by a person from the carrying on of a trade within South Africa. It is therefore important to determine whether a trade is carried on inside or outside South Africa – see 5.
5. Determination whether a trade is carried on inside or outside South Africa
There is limited precedent in South African case law for determining where trade is carried on.* Although it does not necessarily follow that the place where trade is carried on will be the same as the place where a particular source of income is located, the courts have provided useful guidelines to determine the source of income which may be helpful in determining where trade is carried on.†
In CIR v Black‡ the taxpayer, a Johannesburg-based stockbroker, carried on a business of buying and selling shares through a London broker. The broker was entitled to deal in shares without consulting the taxpayer. The court held that the source of the pro ts was in London because that was where a distinct business of buying and selling shares was being carried on.
In COT v British United Shoe Machinery (SA) (Pty) Ltd§ the taxpayer concluded lease agreements in Port Elizabeth for the use of its’ machinery in Rhodesia for between 5 and 10 years. The court held that the source of the rental income was to be found where the machines were used and hence it was in Rhodesia. The court also noted that the source of rentals from the letting of smaller items for a more limited period (for example, motor cars) would be the lessor’s business and not the property leased.
Consistent with the source cases it is necessary to look at all of the activities which include not only the activities (or lack thereof) of the taxpayer but the activities of the investment management company and the lease managers (including the scope of their authority) and the locations where the tank container is used. It is submitted that the place where trade is carried on will be where the main business activities occur on a continuing basis. In the context of tank containers this will be the place where the international leasing managers carry on their business activities, for example, where they take orders, enter into leases, collect the rent and generally deal with the administration of the container pool on behalf of the taxpayer and the place where the tank containers are actually used by lessees. The taxpayer’s activities in South Africa (for example, the provision of the funds to acquire the tank containers, the signing of an agency agreement in South Africa and the investment management company’s activities conducted on the taxpayer’s behalf) are unlikely to be of suf cient scale to result in a conclusion that the trade is conducted in South Africa.
Thus, in the typical tank-container leasing arrangement described in 2 the trade will be carried on outside South Africa with the result that paragraph (b) of the proviso to section 20 (1) will apply and any rental loss from the letting of containers may not be set off against local trade income. Any such foreign assessed loss will be available for set-off against other foreign trade income derived during the same year of assessment and any remaining balance of the foreign assessed loss must be carried forward to the succeeding year of assessment in which it will be available for set-off against foreign trade income.
Ultimately, however, the determination of where trade is carried on will depend on the facts and circumstances of the particular case.
6. Conclusion
In summary –
• South Africa applies a residence-based tax system under which residents are assessed on their taxable income derived
from their world-wide receipts and accruals, which include income derived from the letting of tank containers;
• rental income derived in a foreign currency must generally be translated to rand by applying the spot rate on the date
of receipt or accrual under section 25D;
* In Khanyile v Club Dry Cleaners (Pty), Ltd & others 1965 (1) SA 563 (D) the court held that a company carrying on a laundry business was not trading outside its licensed area by sending its trucks to collect and deliver laundry outside that area. In ITC 1779 (2004) 66 SATC 353 (C) the court held that even though certain elements of the trade occurred outside the Republic, the exercise of the taxpayer’s wits and labour were the essential elements and those elements were conducted within the Republic. Accordingly, the trade was held to be carried on within the Republic.
† Millin v CIR 1928 AD 207, 3 SATC 170; CIR v Lever Brothers & Unilever Ltd 1946 AD 441, 14 SATC 1; CIR v Epstein 1954 (3) SA 689 (A), 19 SATC 221; CIR v Black 1957 (3) SA 536 (A), 21 SATC 226; COT v British United Shoe Machinery SA (Pty) Ltd 1964 (3) SA 193 (FC), 26 SATC 163; Transvaal Associated Hide and Skin Merchants v Collector of Income Tax Botswana 1967 (BCA), 29 SATC 97; Essential Sterolin Products (Pty) Ltd v CIR 1993 (4) SA 859 (A), 55 SATC 357 and First National Bank of Southern Africa Ltd v C: SARS 2002 (3) SA 375 (SCA), 64 SATC 245. The majority of income tax cases dealing with this subject precede 1 January 2001 when South Africa changed from a source-based to a residence-based system. These cases dealt with the concept of income ‘from any source within South Africa’ which was applicable before 1 January 2001.
‡ 1957 (3) SA 536 (A), 21 SATC 226. § 1964 (3) SA 193 (FC), 26 SATC 163.
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