Tax Talk: Ring-fencing business activities

In this series of articles, Cameron Kotzé, the Tax Partner at Ernst and Young, discusses topical issues for our readers.

THE Minister of Finance announced in her budget speech this year that some business activities will be ring-fenced when the next amendments to the Income Tax Act is made. The business activities that were specifically mentioned were residential and vehicle rental activities.There was also an indication that consideration will be given to ring-fence farming losses.So what does it mean when a business activity is ring-fenced? The taxpayer normally earns a salary and also carries some other type of trade – the other activity is normally a loss-making activity.For income tax purposes, the two are added together and you are taxed on the net amount of the two.You end up paying less tax because your tax payable is calculated on a lower total.Whilst I fully appreciate that all avenues for revenue must be explored, the ring-fencing of the business activities referred to above will have a significant impact on the Namibian economy.One of the main reasons for the active residential building market must surely be the fact that an individual with extra money who is keen to provide for his own pension can obtain some tax benefits from buying a house to rent it out.Investing in a new residential building and renting it out will normally provide you with tax losses for at least the first seven to 10 years, which means that your taxable income will be reduced under the current tax rules.This is so because you get a substantial building allowance in the first year and together with the interest payable on the mortgage loan, the net effect over the first 10 years generates a loss from the renting activity.All things being equal, it is only fair that you can benefit from the loss because you would have had to pay for the building, pay the interest and pay other expenses to generate the rental income.The Minister of Finance also indicated that farming losses may be ring-fenced.This must be a concern for many taxpayers because there are many taxpayers who are part-time farmers (or who claim to be part-time farmers).I am of the view that ring-fencing farming losses should be the last resort the Minister of Finance should turn to for additional revenue.The Receiver of Revenue should rather be challenging the authenticity of certain taxpayers who claim to be earning income from farming.There is sufficient case law that provides guidance on when a taxpayer can be regarded as carrying on farming activities.There are a number of taxpayers who simply won’t pass the tests laid down by the tax courts and, in my view, this is the first step that should be taken by the Receiver to generate additional tax revenue for the country.The Minister of Finance may find that sufficient income will be generated by identifying those taxpayers that don’t really carry on farming activities and it will then not be necessary to ring-fence farming activities.We should not be making exceptions to the norm to make everyone toe the line, rather identify those that are not toeing the line and force them to toe the line! Should readers have queries, they are invited to send them to cameron.kotze@za.ey.com.The business activities that were specifically mentioned were residential and vehicle rental activities.There was also an indication that consideration will be given to ring-fence farming losses.So what does it mean when a business activity is ring-fenced? The taxpayer normally earns a salary and also carries some other type of trade – the other activity is normally a loss-making activity.For income tax purposes, the two are added together and you are taxed on the net amount of the two.You end up paying less tax because your tax payable is calculated on a lower total.Whilst I fully appreciate that all avenues for revenue must be explored, the ring-fencing of the business activities referred to above will have a significant impact on the Namibian economy.One of the main reasons for the active residential building market must surely be the fact that an individual with extra money who is keen to provide for his own pension can obtain some tax benefits from buying a house to rent it out.Investing in a new residential building and renting it out will normally provide you with tax losses for at least the first seven to 10 years, which means that your taxable income will be reduced under the current tax rules.This is so because you get a substantial building allowance in the first year and together with the interest payable on the mortgage loan, the net effect over the first 10 years generates a loss from the renting activity.All things being equal, it is only fair that you can benefit from the loss because you would have had to pay for the building, pay the interest and pay other expenses to generate the rental income.The Minister of Finance also indicated that farming losses may be ring-fenced.This must be a concern for many taxpayers because there are many taxpayers who are part-time farmers (or who claim to be part-time farmers).I am of the view that ring-fencing farming losses should be the last resort the Minister of Finance should turn to for additional revenue.The Receiver of Revenue should rather be challenging the authenticity of certain taxpayers who claim to be earning income from farming.There is sufficient case law that provides guidance on when a taxpayer can be regarded as carrying on farming activities.There are a number of taxpayers who simply won’t pass the tests laid down by the tax courts and, in my view, this is the first step that should be taken by the Receiver to generate additional tax revenue for the country.The Minister of Finance may find that sufficient income will be generated by identifying those taxpayers that don’t really carry on farming activities and it will then not be necessary to ring-fence farming activities.We should not be making exceptions to the norm to make everyone toe the line, rather identify those that are not toeing the line and force them to toe the line! Should readers have queries, they are invited to send them to cameron.kotze@za.ey.com.