20C. Ring-fencing of interest and royalties incurred by headquarter companies
Author: admin_kmos
Section 20B (ITA) – Limitation of losses from disposal of certain assets
20B. Limitation of losses from disposal of certain assets
(1) Any deduction which is allowable during any year of assessment under section 11(o) in respect of the disposal by a person during that year of any asset the full consideration of which will not accrue to that person during that year, must be disregarded in that year,
(2) So much of any amount disregarded in terms of subsection (1), which has not otherwise been allowed as a deduction, may be deducted from the income of that person in any subsequent year of assessment to the extent that any consideration which is received by or accrued to that person in that subsequent year from that disposal is included in the income of that person.
(3) If during any year of assessment a person contemplated in subsection (1) proves that no further consideration will accrue to him or her in that year and any subsequent year as contemplated in subsection (2), so much of the amount which was disregarded in terms of subsection (1) as has not been allowed as a deduction in any year, must be allowed as a deduction from the income of that person in that year of assessment.
Subsection 2A of section 20 of ITA
(2A) In the case of any persons other than a company-
(a) the provisions of subsections (1) and (2) shall mutatis mutandis apply for the purpose of determining the taxable income derived by such person otherwise than from carrying on any trade, the reference in subsection (1) to “taxable income derived by any person from carrying on any trade” and the reference in that subsection to “the income so derived” being respectively construed as including a reference to taxable income derived by that person otherwise than from carrying on any trade and a reference to income so derived; and
(b) the said person shall, subject to the provisos to subsection (1), not be prevented from carrying forward a balance of assessed loss merely by reason of the fact that he has not derived any income during any year of assessment.
[Subssection (2A) amended by section 15 of Act 65 of 1973 and section 19 of Act 8 of 2007 and substituted by section 39 of Act 15 of 2016 effective on 19 January 2017]
“Assessed loss” definition of section 20 of ITA
(2) For the purposes of this section “assessed loss” means any amount by which the deductions admissible under section 11 exceeded the income in respect of which they are so admissible.
“Relative” definition of section 20A of ITA
(b) ‘relative’ in relation to a person means a spouse, parent, child, stepchild, brother, sister, grandchild or grandparent of that person.
“Assessed loss” definition of section 20A of ITA
(10) For the purposes of this section-
(a) ‘assessed loss’ means ‘assessed loss’ as defined in section 20(2); and
Section 20A (ITA) – Ring-fencing of assessed losses of certain trades
20A. Ring-fencing of assessed losses of certain trades
(1) Subject to subsection (3), where the circumstances in subsection (2) apply during any year of assessment in respect of any trade carried on by a natural person, any assessed loss incurred during that year in carrying on that trade may not be set off against any income of that person derived during that year otherwise than from carrying on that trade, notwithstanding section 20(1)(b).
(2) Subsection (1) applies where the taxable income of a person for a year of assessment, determined without having regard to the other provisions of this section and before setting off any assessed loss and balance of assessed loss in terms of section 20, equals or exceeds the amount at which the marginal rate of tax of 39 per cent chargeable in respect of the taxable income of individuals becomes applicable, and where-
(a) that person has, during the five year period ending on the last day of that year of assessment, incurred an assessed loss in at least three years of assessment in carrying on the trade contemplated in subsection (1) (before taking into account any balance of assessed loss carried forward); or
(b) the trade contemplated in subsection (1), in respect of which the assessed loss was incurred constitutes-
(i) any sport practised by that person or any relative;
(ii) any dealing in collectibles by that person or any relative;
(iii) the rental of residential accommodation, unless at least 80 per cent of the residential accommodation is used by persons who are not relatives of that person for at least half of the year of assessment;
(iv) the rental of vehicles, aircraft or boats as defined in the Eighth Schedule, unless at least 80 per cent of the vehicles, aircraft or boats are used by persons who are not relatives of that person for at least half of the year of assessment;
(v) animal showing by that person or any relative;
(vi) farming or animal breeding, unless that person carries on farming or animal breeding on a full-time basis;
[Subparagraph (vi) substituted by section 19(1)(b) of Act 5 of 2026 effective on 1 March, 2026 and applicable in respect of years of assessment commencing on or after that date]
(vii) any form of performing or creative arts practised by that person or any relative;
[Subparagraph (vii) amended by section 37 of Act 23 of 2018 effective on 17 January 2019]
(viii) any form of gambling or betting practised by that person or any relative; or
[Subparagraph (viii) amended by section 37 of Act 23 of 2018 effective on 17 January 2019]
(ix) the acquisition or disposal of any crypto asset.
[Subparagraph (ix) added by section 37 of Act 23 of 2018 and substituted by section 23 of Act 23 of 2020]
[Subsection (2) amended by section 27(1) of Act 31 of 2005 and by section 19(1)(a) of Act 5 of 2026 effective on 1 March, 2026 and applicable in respect of years of assessment commencing on or after that date]
(3) The provisions of subsection (1) do not apply in respect of an assessed loss incurred by a person during any year of assessment from carrying on any trade contemplated in subsection (2)(a) or (b), where that trade constitutes a business in respect of which there is a reasonable prospect of deriving taxable income (other than taxable capital gain) within a reasonable period having special regard to-
(a) the proportion of the gross income derived from that trade in that year of assessment in relation to the amount of the allowable deductions incurred in carrying on that trade during that year;
(b) the level of activities carried on by that person or the amount of expenses incurred by that person in respect of advertising, promoting or selling in carrying on that trade;
(c) whether that trade is carried on in a commercial manner, taking into account-
(i) the number of full-time employees appointed for purposes of that trade (other than persons partly or wholly employed to provide services of a domestic or private nature);
(ii) the commercial setting of the premises where the trade is carried on;
(iii) the extent of the equipment used exclusively for purposes of carrying on that trade; and
(iv) the time that the person spends at the premises conducting that business;
(d) the number of years of assessment during which assessed losses were incurred in carrying on that trade in relation to the period from the date when that person commenced carrying on that trade and taking into account-
(i) any unexpected events giving rise to any of those assessed losses; and
(ii) the nature of the business involved;
(e) the business plans of that person and any changes thereto to ensure that taxable income is derived in future from carrying on that trade; and
(f) the extent to which any asset attributable to that trade is used, or is available for use, by that person or any relative of that person for recreational purposes or personal consumption.
(4) Subsection (3) does not apply in respect of a trade contemplated in subsection (2)(b) (other than farming) carried on by a person during any year of assessment where that person has, during the 10 year period ending on the last day of that year of assessment, incurred an assessed loss in at least six years of assessment in carrying on that trade (before taking into account any balance of assessed loss carried forward).
[Subsection (4) substituted by section 23 of Act 34 of 2019]
(5) Notwithstanding section 20(1)(a), any balance of assessed loss carried forward from the preceding year of assessment, which is attributable to an assessed loss in respect of which subsection (1) applied in that preceding year or any prior year of assessment, may not be set off against any income derived by that person otherwise than from carrying on the trade contemplated in subsection (1).
(6) For the purposes of this section and section 20, the income derived from any trade referred to in subsections (1) or (5), includes any amount-
(a) which is included in the income of that person in terms of section 8 in respect of an amount deducted in any year of assessment in carrying on that trade; or
(b) derived from the disposal after cessation of that trade of any assets used in carrying on that trade.
(7) Notwithstanding anything to the contrary contained in this Act, all farming activities carried on by a person shall be deemed to constitute a single trade carried on by that person for the purposes of this section.
(8) Where the provisions of subsection (2) apply during any year of assessment in respect of any trade carried on by a person, that person must indicate the nature of the business in his or her return contemplated in section 66 for that year of assessment.
(9) For the purposes of subsections (2)(a) and (4), any assessed loss incurred in any year of assessment ending on or before 29 February 2004 shall not be taken into account.
Subsections 2, 3, 4, 5, 6, 7 and 8 of section 19 of ITA
(2) Subject to subsection (8), this section applies where-
(a) a debt benefit in respect of a debt owed by a person arises in respect of a year of assessment by reason or as a result of a concession or compromise in respect of that debt during that year of assessment; and
[Paragraph (a) substituted by section 36 of Act 23 of 2018 effective on 1 January 2018 and applies in respect of years of assessment commencing on or after that date]
(b) the amount of that debt is owed by that person in respect of or was used by that person to fund, directly or indirectly, any expenditure in respect of which a deduction or allowance was granted in terms of this Act.
[Paragraph (b) substituted by section 36 of Act 23 of 2018 effective on 1 January 2018 and applies in respect of years of assessment commencing on or after that date]
(3) Where-
(a) a debt benefit arises in respect of a debt owed by a person as contemplated in subsection (2); and
(b) the amount of that debt is owed in respect of or was used as contemplated in paragraph (b) of that subsection to fund expenditure incurred in respect of trading stock that is held and not disposed of by that person at the time the debt benefit arises,
[Paragraph (b) substituted by section 36 of Act 23 of 2018 effective on 1 January 2018 and applies in respect of years of assessment commencing on or after that date]
the debt benefit in respect of that debt must, to the extent that an amount is taken into account by that person in respect of that trading stock in terms of section 11(a) or 22(1) or (2) for the year of assessment in which the debt benefit arises, be applied to reduce the amount so taken into account in respect of that trading stock.
(4) Where-
(a) a debt benefit arises in respect of a debt owed by a person as contemplated in subsection (2);
(b) the amount of that debt is owed in respect of or was used as contemplated in paragraph (b) of that subsection to fund expenditure incurred in respect of trading stock that is held and not disposed of by that person at the time the debt benefit arises, and
[Paragraph (b) substituted by section 36 of Act 23 of 2018 effective on 1 January 2018 and applies in respect of years of assessment commencing on or after that date]
(c) subsection (3) has been applied to reduce an amount taken into account by that person in respect of trading stock as contemplated in that subsection to the full extent of that amount so taken into account,
the debt benefit in respect of that debt, less any amount of that debt benefit that has been applied to reduce an amount as contemplated in subsection (3) must, to the extent that a deduction or allowance was granted in terms of this Act to that person in respect of that expenditure, be deemed, for the purposes of section 8(4)(a), to be an amount that has been recovered or recouped by that person for the year of assessment in which the debt benefit arises.
(5) Where-
(a) a debt benefit arises in respect of a debt owed by a person as contemplated in subsection (2); and
(b) the amount of that debt is owed in respect of or was used as contemplated in paragraph (b) of that subsection to fund expenditure other than expenditure incurred—
(i) in respect of trading stock that is held and not disposed of by that person at the time the debt benefit arises; or
(ii) in respect of an allowance asset,
[Paragraph (b) amended by section 36(1)(g) of Act 23 of 2018 deemed effective on 1 January, 2018 and applicable in respect of years of assessment commencing on or after that date]
the debt benefit in respect of that debt must, to the extent that a deduction or allowance was granted in terms of this Act to that person in respect of that expenditure, be deemed, for the purposes of section 8(4)(a), to be an amount that has been recovered or recouped by that person for the year of assessment in which the debt benefit arises.
(6) Where-
(a) a debt benefit arises in respect of a debt owed by a person as contemplated in subsection (2); and
(b) the amount of that debt is owed in respect of or was used as contemplated in paragraph (b) of that subsection to fund expenditure incurred in respect of an allowance asset that was not disposed of in a year of assessment prior to that in which that debt benefit arises,
[Paragraph (b) substituted by section 36(1)(h) of Act 23 of 2018 deemed effective on 1 January, 2018 and applicable in respect of years of assessment commencing on or after that date]
the debt benefit in respect of that debt must, to the extent that-
(i) a deduction or allowance was granted in terms of this Act to that person in respect of that expenditure; and
(ii) the debt benefit has not been applied as contemplated in paragraph 12A of the Eighth Schedule to reduce the amount of expenditure as contemplated in paragraph 20 of that Schedule in respect of that allowance asset,
be deemed, for the purposes of section 8(4)(a), to be an amount that has been recovered or recouped by that person for the year of assessment in which the debt benefit arises.
(6A) Where-
(a) a debt benefit arises during any year of assessment in respect of a debt owed by a person as contemplated in subsection (2); and
(b) the amount of that debt is owed in respect of or was used as contemplated in paragraph (b) of that subsection to fund expenditure incurred in respect of an allowance asset that was disposed of in a year of assessment prior to that in which that debt benefit arises,
that person must treat the debt benefit in respect of that debt to the extent that—
(i) a deduction or allowance was granted in terms of this Act to that person in respect of that expenditure; and
(ii) that debt benefit has not been applied as contemplated in paragraph 12A of the Eighth Schedule to reduce the amount of expenditure as contemplated in paragraph 20 of that Schedule in respect of the allowance asset,
less any amount, if any, previously determined in respect of that disposal as a recovery or recoupment of a deduction or allowance, as an amount recovered or recouped for purposes of section 8(4)(a) in the year of assessment in which that debt benefit arises.
[Subsection (6A) inserted by section 36(1)(i) of Act 23 of 2018 and substituted by section 10(1) of Act 20 of 2022 effective on 1 January, 2023 and applicable in respect of years of assessment commencing on or after that date]
(7) Where a debt benefit arises in respect of a debt owed by a person that was used to fund expenditure incurred in respect of an allowance asset, the aggregate amount of the deductions and allowances allowable to that person in respect of that allowance asset may not exceed an amount equal to the aggregate of the expenditure incurred in the acquisition of that allowance asset, reduced by an amount equal to the sum of-
(a) the debt benefit in respect of that debt; and
(b) the aggregate amount of all deductions and allowances previously allowed to that person in respect of that allowance asset.
(8) This section must not apply to a debt benefit in respect of any debt owed by a person-
(a) that is an heir or legatee of a deceased estate, to the extent that-
(i) the debt is owed to that deceased estate;
(ii) the debt is reduced by the deceased estate; and
(iii) the amount by which the debt is reduced by the deceased estate forms part of the property of the deceased estate for the purposes of the Estate Duty Act;
(b) to the extent that the debt is reduced by way of-
(i) a donation as defined in section 55(1); or
(ii) any transaction to which section 58 applies,
in respect of which donations tax is payable;
[Paragraph (b) substituted by section 36(1)(j) of Act 23 of 2018 and amended by section 17(1)(b) of Act 20 of 2021]
(c) to an employer of that person, to the extent that the debt is reduced in the circumstances contemplated in paragraph 2(h) of the Seventh Schedule;
(d) to another person where the person that owes that debt is a company if-
(i) that company owes that debt to a company that forms part of the same group of companies as that company; and
(ii) that company has not carried on any trade,
during the year of assessment in which that debt benefit arises as well as during the immediately preceding year of assessment: Provided that this paragraph must not apply in respect of any debt-
(aa) incurred, directly or indirectly by that company to fund expenditure incurred in respect of any asset that is disposed of by that company, before or after that debt benefit arises, by way of an asset-for-share, intra-group or amalgamation transaction or a liquidation distribution in respect of which the provisions of section 42, 44, 45 or 47, as the case may be, applied; or;
[Subparagraph (aa) substituted by section 23(1)(a) of Act 17 of 2023 with effect from 1 January, 2024 and applicable in respect of years of assessment commencing on or after that date]
(bb) incurred or assumed by that company in order to settle, take over, refinance or renew, directly or indirectly, any debt incurred by-
(A) any other company that forms part of the same group of companies; or
(B) any company that is a controlled foreign company in relation to any company that forms part of the same group of companies;
[Paragraph (d) amended by section 36 of Act 23 of 2018 effective on 1 January 2018, applies in respect of years of assessment commencing on or after that date]
: Provided further that where a debt benefit arises prior to the disposal of the asset, that debt benefit must be treated as a debt benefit that arose immediately before that disposal;
[Paragraph (d) amended by section 36(1)(k) of Act 23 of 2018 and by section 23(1)(b) of Act 17 of 2023 with effect from 1 January, 2024 and applicable in respect of years of assessment commencing on or after that date]
(e) to another person where the person that owes that debt is a company that-
(i) owes that debt to a company that forms part of the same group of companies as that company; and
(ii) reduces or settles that debt, directly or indirectly, by means of shares issued by that company:
Provided that this paragraph must not apply in respect of any debt that was incurred or assumed by that company in order to settle, take over, refinance or renew, directly or indirectly, any debt incurred by another company which-
(aa) did not form part of that same group of companies at the time that that other company incurred that debt; or
(bb) does not form part of that same group of companies at the time that that company reduces or settles that debt, directly or indirectly, by means of shares issued by that company; or
[Paragraph (e) amended by section 36 of Act 23 of 2018 effective on 1 January 2018, applies in respect of years of assessment commencing on or after that date]
(f) to the extent that the debt so owed-
(i) is settled by means of an arrangement described in paragraph (b) of the definition of ‘concession or compromise’; and
(ii) does not consist of or represent an amount owed by that person in respect of any interest as defined in section 24J incurred by that person during any year of assessment.
[Paragraph (f) added by section 36(1)(k) Act 23 of 2018 deemed effective on 1 January, 2018 and applicable in respect of years of assessment commencing on or after that date. Subparagraph (ii) substituted by section 17(1)(c) of Act 20 of 2021 effective on 1 January, 2022 and applicable in respect of years of assessment commencing on or after that date]
[Section 19 amended by section 15 of Act 90 of 1962, by section 6 of Act 6 of 1963, by section 17 of Act 88 of 1965, by section 17(1) of Act 88 of 1971, by section 14(1) of Act 90 of 1972, by section 18 of Act 85 of 1974, by section 14 of Act 104 of 1980, by section 17 of Act 96 of 1981, by section 15(1) of Act 91 of 1982, by section 17(1) of Act 94 of 1983, by section 17 of Act 121 of 1984, by section 12(1) of Act 96 of 1985, by section 12 of Act 65 of 1986, by section 4(1) of Act 108 of 1986, by section 13 of Act 85 of 1987, by section 18(1) of Act 101 of 1990, by section 21 of Act 129 of 1991, by section 33 of Act 30 of 1998, repealed by section 25(1) of Act 30 of 2000, inserted by section 36(1) of Act 22 of 2012, amended by section 53(1)(a)-(h) of Act 31 of 2013, by section 30 of Act 43 of 2014 and by section 35 of Act 25 of 2015 and substituted by section 32(1) of Act 17 of 2017 with effect from 1 January, 2018 and applicable in respect of years of assessment commencing on or after that date. Paragraph (f) added by section 36(1)(k) Act 23 of 2018 effective on 1 January, 2018 and applicable in respect of years of assessment commencing on or after that date. Subparagraph (ii) substituted by section 17(1)(c) of Act 20 of 2021 with effect from 1 January, 2022 and applicable in respect of years of assessment commencing on or after that date]
“Debt benefit” definition of section 19 of ITA
‘debt benefit’, in respect of a debt owed by a person to another person, means-
(a) in the case of an arrangement described in paragraph (a) (i) of the definition of ‘concession or compromise’, the amount cancelled or waived;
(b) in the case of the extinction of that debt by means of an arrangement described in paragraph (a)(ii) of the definition of ‘concession or compromise’, the amount by which the face value of the claim in respect of that debt held by the person to whom the debt is owed prior to the entering into of that arrangement exceeds the expenditure incurred in respect of-
(i) the redemption of that debt; or
(ii) the acquisition of the claim in respect of that debt;
(c) in the case of the settling of that debt by means of an arrangement described in paragraph (b) of the definition of ‘concession or compromise’, where the person who acquired shares in a company in terms of that arrangement did not hold an effective interest in the shares of that company prior to the entering into of that arrangement, the amount by which the face value of the claim held in respect of that debt prior to the entering into of that arrangement exceeds the market value of the shares acquired by reason or as a result of the implementation of that arrangement; or
(d) in the case of the settling of that debt by means of an arrangement described in paragraph (b) of the definition of ‘concession or compromise’, where the person who acquired shares in a company in terms of that arrangement held an effective interest in the shares of that company prior to the entering into of that arrangement, the amount by which the face value of the claim held in respect of that debt prior to the entering into of that arrangement exceeds the amount by which the market value of any effective interest held by that person in the shares of that company immediately after the implementation of that arrangement exceeds, solely as a result of the implementation of that arrangement, the market value of the effective interest held by that person in the shares of that company immediately prior to the entering into of that arrangement;
[Definition of “debt benefit” substituted by section 36 of Act 23 of 2018 effective on 1 January 2018, applies in respect of years of assessment commencing on or after that date]
“Debt” definition of section 19 of ITA
‘debt’ means any amount that is owed by a person in respect of-
(a) expenditure incurred by that person; or
(b) a loan, advance or credit that was used, directly or indirectly, to fund any expenditure incurred by that person,
but does not include a tax debt as defined in section 1 of the Tax Administration Act;
[Definition of “debt” substituted by section 36 of Act 23 of 2018 effective on 1 January 2018, applies in respect of years of assessment commencing on or after that date]