What I was actually requiring clarity on was whether the expenses incurred in the production of the trade (rental) income will be disallowed as the property is now rented to a connected person(her brother).
Important:
This answer is based on tax law for the tax year ending 28 February 2020.
Answer:
We actually dealt with that in our response. The principle is that, as long as the expense is incurred in the production of income, as is required by section 11(a) or section 24J(2), the taxpayer can make the deduction. The fact that the income is derived from a connected person is irrelevant. The income, factually, is derived from the carrying on of a trade - the letting of immovable property, is a trade (see section 1(1) of the Act).
Your concern here may arise from the fact that the income, the amounts derived from the lease agreement (rentals), may not be, or factually are not, market related. Where the parties to the agreement are connected persons in relation to each other, family and relatives as in this case, it is common for the amount not to be an arm’s length value.
But the deduction can’t be disallowed, based on that fact alone. It may well be a reason why, and we referred to that in our first response, section 23(g) may apply and only a part of the expense may be deducted. So, the other part is then added back (or disallowed). It may, in practice, be difficult to do an apportionment here, and may well be the reason why SARS introduced the ring-fencing provisions (section 20A that we included in out first response). The result of that, and if it applies (above R1,5 million in the first place), the excess expenses (over the rental income) are ringfenced. It can’t be deducted against other income of the taxpayer and is carried forward to future years of assessment. It will then be deducted when the annual rental income exceeds the expenses.