LU7 – ASSESSED LOSSES- S20
Assessed loss occurs when Expenses allowed i.t.o the Act > income of the taxpayer in a particular year.
I.t.o S20, in determining the taxable income of a person who is carrying on a trade the taxpayer may deduct
from such trade income in the current year:
The balance of an assessed loss carried forward from a prior year.
An assessed loss incurred in the current year from any other trade carried on in the RSA.
Assessed losses carried forward from a prior tax year may be set off against trade income received. In addition,
assessed losses from one trade in the RSA may be set off against income from another trade (unless the ring-
fencing provisions of S20A apply).
For companies it is essential that a trade is carried on. However, i.t.o S20 (2A) this requirement does not apply
to natural persons and trusts that may set an assessed loss of against non-trade income.
There is a second requirement that income must be derived from a trade in order for the carried-forward
assessed loss to be set off. However, SARS issued interpretation Note 33 in July 2005, which deals with assed
losses in companies and states that as long as the company has proved that a trade has been carried on during
the current year of assessment, the company will be entitled to set off the balance of its assessed loss from the
preceding year of assessment, the company will be entitled to set off the balance of its assessed loss from the
preceding year despite the fact that trade income was not received during the current year.
The set-off of an assessed loss is subject to the following i.t.o S20 (1) proviso:
An assessed loss may not be carried forward by a person whose estate has been sequestrated unless
the order of sequestration has been set aside. I.t.o S25C, the insolvent estate and the estate of the
taxpayer prior to sequestration are deemed to be the same person, therefore the assed loss that
existed prior to sequestration is available to the insolvent estate.
When the order of sequestration is set aside the balance of the assessed loss (after deducting income earned
by the insolvent estate) reverts to the individual.
FOREIGN ASSESSED LOSSES
An assed loss from a trade carried on outside the RSA may be set off against income earned from other trades.
If there is no other foreign trade on which to offset the assessed loss, then the assessed loss may be carried
forward to the next year of assessment and set off against foreign trade income in that year.
REDUCTION OR CANCELLATION OF DEBT
Where the debt was utilised to purchase trading stock will have the following effect:
Where the trading stock still on hand: reduce the cost of the trading stock by the reduction amount
(amount by which the debt is reduced less the amount applied by person as consideration for the
reduction)
Where stock is partly sold: reduce the cost of trading stock still on hand and treat the balance as an
income amount (this will have the effect of reducing the assessed loss)
Where the debt cancelled or reduced was utilised to fun tax-deductible expenditure, the reduction amount
must be treated as a recoupment and be include in gross income (thereby reducing the assessed loss)
Assessed loss occurs when Expenses allowed i.t.o the Act > income of the taxpayer in a particular year.
I.t.o S20, in determining the taxable income of a person who is carrying on a trade the taxpayer may deduct
from such trade income in the current year:
The balance of an assessed loss carried forward from a prior year.
An assessed loss incurred in the current year from any other trade carried on in the RSA.
Assessed losses carried forward from a prior tax year may be set off against trade income received. In addition,
assessed losses from one trade in the RSA may be set off against income from another trade (unless the ring-
fencing provisions of S20A apply).
For companies it is essential that a trade is carried on. However, i.t.o S20 (2A) this requirement does not apply
to natural persons and trusts that may set an assessed loss of against non-trade income.
There is a second requirement that income must be derived from a trade in order for the carried-forward
assessed loss to be set off. However, SARS issued interpretation Note 33 in July 2005, which deals with assed
losses in companies and states that as long as the company has proved that a trade has been carried on during
the current year of assessment, the company will be entitled to set off the balance of its assessed loss from the
preceding year of assessment, the company will be entitled to set off the balance of its assessed loss from the
preceding year despite the fact that trade income was not received during the current year.
The set-off of an assessed loss is subject to the following i.t.o S20 (1) proviso:
An assessed loss may not be carried forward by a person whose estate has been sequestrated unless
the order of sequestration has been set aside. I.t.o S25C, the insolvent estate and the estate of the
taxpayer prior to sequestration are deemed to be the same person, therefore the assed loss that
existed prior to sequestration is available to the insolvent estate.
When the order of sequestration is set aside the balance of the assessed loss (after deducting income earned
by the insolvent estate) reverts to the individual.
FOREIGN ASSESSED LOSSES
An assed loss from a trade carried on outside the RSA may be set off against income earned from other trades.
If there is no other foreign trade on which to offset the assessed loss, then the assessed loss may be carried
forward to the next year of assessment and set off against foreign trade income in that year.
REDUCTION OR CANCELLATION OF DEBT
Where the debt was utilised to purchase trading stock will have the following effect:
Where the trading stock still on hand: reduce the cost of the trading stock by the reduction amount
(amount by which the debt is reduced less the amount applied by person as consideration for the
reduction)
Where stock is partly sold: reduce the cost of trading stock still on hand and treat the balance as an
income amount (this will have the effect of reducing the assessed loss)
Where the debt cancelled or reduced was utilised to fun tax-deductible expenditure, the reduction amount
must be treated as a recoupment and be include in gross income (thereby reducing the assessed loss)
