Let’s quickly recap what SARS allows on this topic.
The general deduction rule stipulates that you can only deduct expenses incurred in the production of income that you may have earned from carrying on a trade. In other words, expenses after you have started to trade.
Section 11 A however does allow you to deduct expenses and losses:
- that was actually incurred prior to the commencement of and in preparation for carrying on that trade,
- which would have been allowed as a deduction according to the general deduction rule, had the expenditure or loss been incurred after you commenced that trade, and
- which haven’t been allowed as a deduction in that year or any previous tax years.
You may only claim a deduction of pre-trade or preparation expenses once you’ve commenced trading and any losses incurred before you commenced doing business can’t be off-set against any revenue that is derived from another business.
VAT on pre-trade expenses
If your business is reimbursed for the expenses of the goods and services that you would normally use to do business, then it can claim an input tax deduction for the reimbursement.
Ensure that you qualify for this VAT input deduction by ensuring that:
- the supply is a taxable supply
- the goods or services are acquired within six months of the company’s incorporation, and
- you keep sufficient records of the expenses.
John sells life insurance and carries on business through LifeInsure (Pty) Ltd. John decides to open up another business in the food and beverage industry, by utilising LifeInsure (Pty) Ltd.
- The food and beverage business was opened in the 2012 year.
- The following represents the financial transactions incurred by LifeInsure for the 2011 and 2012 years.
- John must calculate the taxable income of LifeInsure for 2012
2011 Tax year
|Profit from selling life insurance||R220,000|
|Preparation expenses for food and beverage business:|
2012 Tax year
|Profit from selling life insurance||R275,000|
|Food & Beverage Income||R610,000|
|Food & Beverage Expenses||(R595,000)|
|Food & Beverage Profit before tax||R 15,000|
Computation of taxable income
2011 Tax Year
2012 Tax Year
|Profit from selling life insurance||
|Preparation expenses not deductible in 2011 as food & beverage business did not commence during the year||
|Limited pre-trade expenses||
|Food & Beverage Profit before tax||
Any food & beverage pre-trade expenses that exceeds the income earned over the year (calculated after the deduction of allowable amounts), can’t be off-set against the income derived from selling life insurance.
John will have to carry the R15,250 balance of the pre-trade expenses forward to the 2013 tax year. (R30,250 – R15,000)