29 June 2012
Posted by: SAIT Technical
By Michael Stein (Friday Page)
Section 11A of the Income Tax Act allows a deduction from the income derived by a person from the carrying on of a trade of expenditure and losses actually incurred by the person prior to the commencement of and in preparation for carrying on that trade. The deduction is allowed as long as it would have been allowed as a deduction in terms of s11 (but not s11(x)) or ss11B, 11D or 24J had the expenditure or losses been incurred after the person commenced carrying on that trade. A second qualification is that the expenditure and losses must not otherwise have been allowed as a deduction in that year or any previous year of assessment.
Section11 contains a series of deductions, while s11(x) brings within the ambit of s11 deductions and allowances available under provisions other than s11 itself. The effect of the exclusion of deductions and allowances referred to in s11(x) is to limit the deduction under s11A to deductions and allowances under s11 itself only (as well as s11B, s11D and s24J).
Section 11B allows a deduction for research and development, s11D allows a deduction for scientific or technological research and development and s24J deals with the incurral and accrual of interest. Why these particular provisions have been selected for favoured treatment is anyone's guess.
Then comes a form of ring-fencing. Section11A provides that so much of the expenditure and losses mentioned above that have been brought forward as exceeds the income derived during the year of assessment from carrying on the relevant trade after deduction of any other current amounts allowable in that year of assessment under any other provision of the Act may not be set off against any income of the person that is derived otherwise than from carrying on that particular trade, notwithstanding the usual assessed loss rules.
This means that the deductions brought forward to be deducted in the year of commencement of trade may be deducted only to the extent of the taxable income from the relevant trade after all current deductions have been allowed. But then there is an apparent anomaly in that there is no provision for the carry forward to future years of assessment of the balance of the deductions brought forward to the extent that they exceed the amount that may be allowed as a deduction under s11A in the year of commencement of trade.