What does Ring-Fencing a Loss mean? 

Ring-fencing the loss simply means that the amount gets carried over to the following year and can only be set off against income from the same trade. 

When pursuing a business activity, trade or renting out a property, you’re no doubt doing so to make some money, but the reality for self-starters is that there’s a good chance it’s going to take some time for your venture to break even, which can often mean facing a loss.

Your additional income is of interest to SARS as it translates into more tax revenue for them. So how do you record your loss to them? When, how and where is the loss applied from a tax perspective?

The Tax Act stipulates that an overall loss on your business activity for a tax year, called an “assessed loss” occurs when your expenses incurred in generating the income exceeds the actual income received.

For example, if you rent out a property but the total rental expenses - such as interest on your bond, rates and levies, maintenance costs, insurance, advertising and agent management fees – amounts to more than the total rental income received for the tax year, this results in an overall loss.

In the case of an “assessed loss”, there are 3 possible scenarios:

• If you have no other income, the loss is simply carried forward to the following year, but not ring-fenced for deduction from a specific income source in the next year.

• If you have any other forms of income such as salary or interest, the loss may be deducted from this income. This would reduce your overall taxable income and therefore your tax liability.

• The loss is ring-fenced until a future tax year

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