What is ring fencing?

Under certain circumstances an assessed loss may only be deducted from future taxable profits earned as a result of the same trade.

An example, which is the one I want to deal with here, is when a natural person earns a salary and also rents out property. If the property rental business makes a loss, there is a possibility that the loss cannot be deducted from the salary income for tax purposes but can only be deducted from future rental profits.

So, what are those circumstances? See s20A of the Income Tax Act.

• Ring fencing only arises if the person is being taxed at the maximum marginal rate. Currently this happens when the income is about R1,8m, or R150 000 per month. If you don’t earn that much, you can skip the rest of this article.
• An assessed loss from the rental has arisen in at least three out of the last five years.
• The rental is in respect of residential accommodation.
• More than 20% of the rented residential accommodation is used by relatives of the taxpayer for more than half the year of assessment.
• And even then, the ringfencing does not apply if this is a serious rental business with a fair chance of future profits within a reasonable time.