Will ring-fencing apply i.r.o Second Property? Taxpayer is not SA Citizen and visits SA once a year approx 30 days at a time. He is SARS taxed on his SA Source Income, received and or accrued. He owns two upmarket residential properties in SA
Important:
This answer is based on tax law for the tax year ending 28 February 2020.
Answer:
You are reminded that we only provide guidance. We will therefore not provide an opinion as to whether section 20A applies here.
As an initial point, we need to remind you that, under section 20A(8), the person must indicate the nature of the business in his or her return contemplated in section 66 for that year of assessment, where the provisions of section 20A(2) apply during any year of assessment in respect of any trade carried on by a person. There is a specific question on the annual return of income, the ITR12, that requires and answer to the following question:
“Should the loss incurred be excluded (ring-fenced) for the calculation of your tax liability?”
We will deal with the marginal rate of tax rate later, but it is necessary to point out that there is an important difference between section 20A(2)(a) and section 20A(2)(b). Section 20A(2)(b), the so-called “suspect trade” one, doesn’t have any reference to a year of assessment, or to three out of five years of assessment (as does section 20A(2)(a)). That means that the ring-fencing will apply in every year where an assessed loss arises from the suspect trade.
In this instance, we submit, the trade in respect of which the assessed loss was incurred constitutes the rental of residential accommodation. And, more than 20% of the residential accommodation is used by a person who is a relative of the taxpayer for at least half of the year of assessment. Factually, 100% and for the full year of assessment. On that basis section 20A(1) applies and the loss must be ringfenced.
But, one of the circumstances in section 20A(2) is, as you pointed out, is that “the sum of the taxable income” of the person for a year of assessment (determined without having regard to the other provisions of section 20A) and any assessed loss and balance of assessed loss which were set off in terms of section 20 in determining that taxable income, must be equal to or exceed “the amount at which the maximum marginal rate of tax chargeable in respect of the taxable income of individuals becomes applicable”. If the taxable income of the individual concerned is below this threshold, section 20A(2) does not apply. SARS confirms this in their guide, copied below:
“Conversely, if the adjusted taxable income is below the level at which the maximum marginal rate of tax becomes payable, the assessed loss may not be ring-fenced, regardless of the number of years in which losses have been incurred and the nature of the trade being carried on.”
You state that the individual is “not SA Citizen and visits SA once a year approx 30 days at a time”. It is possible that the individual is someone who is a resident of another country, or is someone who is deemed to be exclusively a resident of another country for purposes of the application of any agreement entered into between the governments of the RSA and that other country for the avoidance of double taxation.
As there is a tax benefit where the rental is not an arm’s length rental, section 31 will apply here.