Section 20A does not replace sections 11(a) and 23(g). All expenses that do not qualify in terms of section 11(a) or are declined as a deduction in terms of section 23(g), are lost permanently. Article 20A is thus in contrast to sections 11(a) and 23(g) since expenses are not permanently disallowed but only ring-fenced by allowing them as a deduction against future taxable income of the primary industry.
Section 20A(2) lays down the following requirements according to which assessed losses will be ring-fenced:
1. If a taxpayer is taxed at the maximum tax rate, before considering any assessed losses and balances of determined losses in the previous years of assessment, the following points 2 to 4 should be considered.
2. Section 20A(2) requires the “3-out-of-5-year” test to be applied for two categories, namely game farming activities and trading in “suspicious” activities –
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- 2.1 Assessed losses resulting from game farming activities in 3 of the 5 preceding years may possibly be ring-fenced.
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- 2.2 Section 20A(2)(b) provides a list of “suspicious activities” and if assessed losses are generated by one of the following activities for at least 3 of the preceding 5 years, such losses may possibly be ring-fenced:
- any sports activities pursued by the taxpayer;
- any trade in collectables;
- letting of residential property, unless at least 80% of the accommodation is used by persons not related to the taxpayer for at least half of the year of assessment;
- letting of vehicles, aircraft or boats as defined in the Eighth Annexure, unless at least 80% of the vehicles, aircraft or boats are used by non-related persons for at least half of the year of assessment;
- putting animals on show by the taxpayer;
- farming or stud farming, unless the taxpayer is carrying on these activities on a full-time basis;
- any form of fine arts or performing arts carried on by the taxpayer;
- any form of gambling or betting carried on by the taxpayer.
3. The above stipulations are not applicable in cases where a loss is incurred for the year of assessment in an industry that has a reasonable chance of generating a taxable income (excluding capital gain) within a reasonable period and also complies with certain criteria as listed in section 20A(3).
4. Although ring-fencing can be avoided under point 3, losses may still be ring-fenced if they are incurred for at least 6 of the preceding 10 years. The onus then rests on the taxpayer to convince SARS that business is carried on with a reasonable prospect of generating taxable income in a reasonable period.