Abstract:
For a taxpayer to be able to carry forward a balance of an assessed loss from a prior year, there are two conditions which have to be fulfilled according to section 20 of the South African Income Tax Act, 58 of 1962 namely: <ul><li> The taxpayer has to be carrying on a trade and, </li><li> Income has to be generated from the trade. </li></ul> The onus to prove that both these requirements have been met rests on the taxpayer in terms of section 82 of the Income Tax Act. This study looks at the second requirement which has been a contentious issue as far as its interpretation is concerned. The first point of departure was to analyse the meaning of “income” in this requirement as there have been conflicting views between the South African Revenue Service’s Interpretation Note No. 33 and various High Court and Supreme Court of Appeal court cases. The area of concern is whether “income” in this context should have its ordinary meaning per the Income Tax Act of “gross income less exempt income” or whether it should be “pre-tax profit” or “taxable income”. The implementation of the “income from trade” requirement often leads to anomalies, unintended results and uncertainty with the application of section 20 of the Income Tax Act. This study takes a look at the “income from trade” requirement and whether the way it is implemented makes good tax policy by analysing the arguments for and against the retention of this requirement. The study also addresses the issue as to whether the use of the purposive interpretation, as opposed to the grammatical interpretation, of section 20 of the Income Tax Act could possibly be followed in cases where the implementation of the “income from trade requirement” leads to anomalies, unintended results and uncertainty with the correct application of section 20.
