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Proposed changes – Individuals with suspect trades · Tax Break: South African tax for professionals

• 0:11
  Welcome and thank you for joining me for Tax break.
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  This is a podcast about South African tax 4 South African tax
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  professionals and practitioners. My name is Peter Frenchman and
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  in each episode I share my thoughts with you on a topic or
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  a recent development in South African tax.
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  And I tried to do it in a relatively short period of time
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  that you can. Whenever you've got a bit of
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  time to think about the technical aspects of tax, you
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  can listen to the podcast today. We are still talking about some
• 0:41
  proposed changes that we find in the draft bills.
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  Now just to maybe refresh your memory again, their draft bills
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  were published for comment on the 16th of August.
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  They are open for comment until the 12th of September and then
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  after that the National Treasury will consider the comments that
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  they received. There would be a consultation
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  session and based on that they would then finalise the the
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  amendments for the 2025 legislative cycle.
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  So important, everything that we are talking about today as far
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  as the changes are concerned are still any proposed changes.
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  It may or may not happen. It's something that you need to
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  keep an eye on as things progress to see if the change
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  comes through. Now what the change that we're
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  talking about today is the proposed change to Section 20,
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  Capital A. Now let's start with what
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  exactly is Section 20 A. It's a section that applies to
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  natural persons, so in other words individuals, and it
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  applies to some suspect traits, losses specifically that you
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  suffer from a suspect, right? So there's the suspect in this
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  case. It's nothing to do with
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  criminality or anything like that.
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  It's suspect in the sense as to whether you are actually
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  conducting A trait or not. So if a tax payer conducts a
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  trait, that tax payer is fully entitled to deduct expenditure
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  and that expenditure may sometimes be a loss.
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  But the risk here is that the these activities by natural
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  persons may not really be a trait.
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  And the protective effect of Section 20A is in to say that if
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  you suffer losses from these suspect rates, you may not
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  offset these losses against your other income.
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  But you need to, you can only utilise the losses against the
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  income of this specific trade. So there's a ring fencing of
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  these losses. As it stands at the moment,
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  Section 20 applies to persons who are taxed at the maximum
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  marginal tax rate. So it remained the same for a
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  few years now and that's at around 1.8 million Rand taxable
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  income. Now if you are in that tax
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  bracket, section 20A has got 2 categories.
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  The first one in paragraph A is to say that if you conduct a
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  trade where for at least three of the last five years you've
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  incurred disease losses, that is a suspect trade.
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  And then paragraph B, which lists specific traits to say
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  that irrespective of how many years you've you've incurred the
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  loss, if you incur a loss in that trade due to the nature of
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  the activity, that is also a suspect, right?
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  So unfortunately, it's, it's not just an open book to say
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  whatever Sasha got to suspect. The legislation specifies a few
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  things that would fall into this paragraph B category, its
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  activities relating to sport. So in my case, if I believe
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  maybe one day I can, I can win a marathon and get a few round for
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  it, I think it's highly unlikely that I would ever do that.
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  But if I were to argue that that's my trait and I start
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  deducting all the cost of my shoes, all the costs of the
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  supplements you take, all the nutrition, everything relating
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  to that, then I'm going to build up a fairly sizeable loss very
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  quickly. So that's a good example as to
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  why something like sport could be a bit suspect.
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  There are of course some people who are professional
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  sportspersons who actually make a a good profit from it.
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  So sport is the is an activity listed.
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  Dealing in collectibles is another activity listed.
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  Any residential rental vehicle rental boats or aircraft rental
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  is is listed unless more than 80% of the the the rentals are
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  to unrelated persons for at least half of the year.
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  Animal showing, farming or animal breeding unless it's done
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  on a full time basis. Performing and creative arts,
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  gambling and betting and then buying and selling crypto.
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  So all of these things, if you make a loss, it is suspect
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  irrespective of how many years you've made the losses.
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  But for both categories, paragraph A and B, there's an
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  exception to say that if you are conducting these activities as a
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  business, so that's a question of fact, whether you can prove
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  that you are conducting it as a business and that business is
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  conducted with a reasonable prospect of taxable income
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  having regard to certain factors listed in the legislation, then
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  you can offset the loss against your, your, your income.
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  But then there's a further exception to say that if you're
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  looking at one of those listed activities in paragraph be other
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  than farming and you've made losses for at least six of the
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  last 10 years, then there's business exception doesn't
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  apply. So it is actually quite a
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  complex provision to to apply and there's a bit of a decision
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  tree that you need to follow to see.
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  But does that ring fencing rule apply or not?
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  The proposal is that the the the core of the provision remains
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  the same. So in other words, what?
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  Which activities are suspect? What are the exceptions?
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  All those things would remain the same.
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  The proposal is that the threshold for where this
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  provision would apply with below it.
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  So at the moment the threshold is set any taxpayers above the
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  tax that the maximum marginal rate and the I, the the proposal
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  is to say that to lower that threshold to 39%.
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  So in other words, taxpayers who are subject to tax at the
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  marginal rate of 39% or more. So it starts to apply to
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  different place on the on the tax rate scale.
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  The National Treasury's reasoning as to why this change
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  is necessary is that they they say that they've noted an
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  increasing use of strategies to claim losses from these
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  suspects, suspect rates that climbing the laws allows the
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  person to remain below the marginal, the maximum marginal
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  rate and therefore outside the scope of Section 28.
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  So I do think that they have a point there.
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  There is a bit of a circularity in the sense that the loss that
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  you are claiming would is the exact same loss that is that
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  could be suspect and that is the loss that's that's keeping you
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  under the maximum marginal rate. So if later I've I'm making I've
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  got income of 2 million rent, I've got the farming activity
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  that that might made a loss of 500,000 trained for the year.
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  If I, if I offset those two, then my taxable income is at 1.5
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  million, which is below the maximum marginal rate.
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  Whereas if the 28 had to apply, I may have been stuck on my on
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  my income only, which would then take me above the maximum
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  marginal rate if I can't offset this loss against the income.
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  So I do think that there is a point in that the exact losses
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  that we that you are trying to address with Section 28 are the
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  ones that could be keeping you below the threshold.
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  The other side of the equation, and I guess it's a more
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  fundamental discussion, is to say when this provision was
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  introduced, it was aimed at the highest income earners.
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  If you were in that bracket, even though you could have
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  possibly you had your income, you had the loss.
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  But because you are in that high income bracket, the loss
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  wouldn't necessarily take you below the, the, the, the
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  threshold or the below the maximum marginal rate.
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  So those were the taxpayers that this provision was initially
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  aimed at. Now, because the, the tax
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  brackets have remained the same for a number of years, you've
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  now got people who are in the, the, the, the, let's call it the
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  bracket below what, where this provision was initially intended
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  to apply because the income is growing with inflation who are
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  now growing into potentially being in that top tax bracket if
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  it's not for the losses that they, that they are setting off
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  against their income. So I think they, they, there's
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  possibly a question to say, but was it ever the intention to do
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  for the ring fencing to also catch these taxpayers?
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  If it was then the question we could perhaps be, but why was
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  why the maximum marginal tax rate then why was that the
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  threshold when this provision was introduced?
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  So I think there is a bit of an interplay between the tax
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  brackets not moving and when Section 20 applies or what, what
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  taxpayers are potentially subject to it.
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  That may be a point of discussion.
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  So to summarise, perhaps if you or your clients are engaged in
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  these activities that are possibly suspect traits, you may
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  want to keep an eye on the, the, the changes to the legislation.
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  As I've also explained, Section 20 cap is not an absolute,
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  absolute denial of the offset, but it there are a few things
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  that you need to consider before you can offset the loss against
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  your income. So there's a bit of a process to
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  to think through and but and you could end up at the answer to
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  say, but that that loss is is ring fenced.
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  Now. That's it for today's episode.
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  If you've got any questions or comments, please send me an
• 11:00
  e-mail. My e-mail address is in the show
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  notes. It's always nice to get
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  correspondence from listeners who who's got ideas or adding to
• 11:08
  say, but you could have possibly also spoken about this or that.
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  It's really good to get that interaction from the podcast.
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  If you like the podcast, I want to ask you to please send the
• 11:21
  link to this episode to one other person that you think
• 11:24
  might also be interested in listening to it.
• 11:28
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  about this podcast. Just reminder, as every other
• 11:43
  week, the podcast is not intended to be tax advice or a
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  replacement for fact specific tax advice.
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  Especially in the context of today's episode where we are
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  talking about proposed changes, it's definitely not something
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  that you should consider as advice.
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  The podcast is only for information purposes.
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  Until next time, goodbye.