SARS published Interpretation Note No 33 on 30 June 2010. The Interpretation Note deals with assessed losses of corporate taxpayers. In particular, it deals with the circumstances in which corporates may forfeit assessed losses.
The Interpretation Note does not constitute law. But it does give taxpayers an idea of the approach that SARS takes in relation to the issue. It is also a good additional source for research on the topic.
The position of SARS can be summarised as follows:
- A corporate taxpayer can only carry forward an assessed loss if it meets two requirements. First, it must carry on a trade in the current tax year. Second, the taxpayer must earn income from a trade.
- As to the trade requirement, although the term 'trade' is widely defined in section 1 the Income Tax Act, No 58 of 1962 (the Act), SARS adopts a strict, objective approach when considering whether or not a taxpayer is carrying on a trade. The taxpayer must not only have an intention to trade or undertake some preparatory steps. Also, where the taxpayer is being wound up, it must not simply realise assets or collect debts; it must show that it actively pursues a trade.
- Regarding income requirement, it is instructive to note that SARS will allow a taxpayer to carry forward an assessed loss if it has earned income as defined in the Act, ie gross income less exempt income, in the tax year. So, SARS will not require that a taxpayer have taxable income, ie pre-tax profit as was required in a leading Appeal Court case. Also, SARS accepts that the income may arise from any trade, ie not only from the trade carried on by the taxpayer in previous tax years.
Generally, the Interpretation Note shows a pragmatic approach on the part of SARS. But corporates, particularly those who are dormant or are being wound up, must ensure that they build up sufficient evidence that they are carrying on a trade so that they are able to carry forward assessed losses for the future.
Ben Strauss, Director, Tax