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How does ringfencing for rental income work?

Posted 15 June 2016 under Tax Q&A


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TaxNoobie says:
15 June 2016 at 9:18

I have a question, regarding if you make a loss from rental income i. E What if the expenses exceed the rental income? How exactly does this work? please provide an example of how and when it is offset against other income and what does the ring fencing mean? Its difficult to understand the document. Please explain in lay mans terms. What is the best way to make this work for you?

"Should the expenses exceed the rental income, the loss should be available to be off-set against other income earned by the homeowner, provided that losses are not ring fenced in terms of prevailing anti-avoidance provisions. For more information, see our Guide on ring-fencing of assessed losses arising from trade conducted by individuals. The homeowner must effectively be able to satisfy SARS that he is carrying on a bona fide trade through the rental of his property. "

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TaxTim TaxTim says:
15 June 2016 at 10:14

This can get very complicated however the basic principle is that you could ringfence the rental income loss to only apply to rental income profits in future years to reduce the tax paid on that rental profit. This would be a decision you wish to make, but in essence by selecting to ringfince the loss you are delaying the tax benefit of the loss.

Alternatively, assuming you have other current year income, if you don't ring fence, you can set off the loss against other current income and obtain the tax benefit in the current year.

SARS may give you no choice in future years if you continue to make rental losses i.e they may force you to ring fence your rental losses and thereby prevent you from setting off the loss against other income.

TaxNoobie says:
15 June 2016 at 10:27

So, if for now, one is only renting a place out for 12 months, would it be better to just offset it from other income (ie that from my employer?). Also, what if the rent doesn't run entirely within a tax year, eg June-June? How much tax will have to come from my own pocket?

Could you provide an example of this?

TaxTim TaxTim says:
15 June 2016 at 10:54

What is your current salary level?

The tax year runs from 1 March to 28 Feb of the following year and therefore you would declare the rental income split accordingly over two tax years.

TaxNoobie says:
15 June 2016 at 11:12

say about 40k

TaxTim TaxTim says:
15 June 2016 at 11:18

Since you are not in the highest tax bracket, you should be able to set off your loss against current income and therefore avoid the "ring fencing" provisions.

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