[FAQ] When are losses ringfenced?

[FAQ] When are losses ringfenced?

• 08 March 2023
• Individuals Tax
• The Tax Faculty Tax Specialist

This article is based on tax law for the year ending 28 February 2022.

Background

When are losses ringfenced?

Answer

Section 20A of the Income Tax Act applies to the ringfencing of assessed losses incurred by natural taxpayers from certain trades or activities. A taxpayer who is above the maximum marginal rate as at 2023 (that is 45%) could be subject to cetain trade losses being ringfenced. Ringfencing restricts the use of assessed losses from one trade or activity to offset taxable income from another trade or activity.

Section 20A applies to losses incurred from certain trades or activities, including:

1. Non-commercial trades or activities: These are trades or activities that are not carried on for the primary purpose of making a profit. Examples include hobbies or certain personal activities.
2. Passive trades or activities: These are trades or activities where the taxpayer does not actively participate in the day-to-day management or operation of the trade or activity. Examples include rental income from a property where the taxpayer uses a rental agency to manage the property.
3. Speculative trades or activities: These are trades or activities that involve speculation or gambling, such as betting on the stock market or horse racing.

If a taxpayer incurs a loss from one of these trades or activities, Section 20A will ringfence the loss and prevent the taxpayer from offsetting it against taxable income from other trades or activities. The assessed loss can only be carried forward to future years and used to offset income from the same trade or activity that generated the loss.

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