Explaining business start-up tax deductions
More in-depth information can be obtained from SARS
GIVEN the potentially high costs of starting up a new business, and how beneficial new businesses are for economic growth, SARS is providing guidance on when pre-trade expenditure may be deducted from taxable income.
According to Graeme Palmer, Director in the Commercial Department of Garlicke and Bousfield Inc, a business usually relies on the general deduction formula in section 11(a) of the Income Tax Act, 1962, as read with section 23(g) when deducting expenses for tax purposes.
‘To claim a deduction under these sections, a person must be carrying on a trade,’ he said.
‘Claiming a deduction of expenditure incurred before the commencement of trade must be done under section 11a, which allows a taxpayer to deduct expenditure that would have qualified, but for the requirement that the business must be trading.
‘The expenditure is deductible in the year of assessment in which trade commences, subject to certain requirements, and irrespective of when the expenses were incurred.’
There are four key requirements before pre-trade expenses will qualify as a deduction.
These include: the trade in respect of which the pre-trade expenses were incurred must have commenced, pre-trade expenses must have actually been incurred before commencement of trade, for pre-trade expenses to qualify they must meet the ‘post-trade test’, and the pre-trade expense must not have been allowed as a deduction in that year or any previous year.
‘Section 11a(2) provides for ring-fencing of pre-trade expenses.
‘If pre-trade expenses exceed the taxable income of that trade, the excess pre-trade expenses cannot be set-off against the income from any other trade.
‘If any pre-trade expense is not allowed, owing to insufficient taxable income from a particular trade, the amount can be carried forward and set-off against any future taxable income from that trade.’
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