South Africa’s 2025 budget review closes loopholes in the ring-fencing of assessed losses

This article explores the purpose of section 20A, the changes proposed in the latest budget speech, historical adjustments to this provision, and its application to a topical trade such as cryptocurrency. 

Background to Section 20A 

Section 20A was implemented to prevent individuals from continuously offsetting losses from certain trades against other sources of income, thereby reducing their overall tax liability. This mechanism, known as “ring-fencing”, restricts the offsetting of expenditure and losses from certain suspect trades against other sources of income, such as remuneration, unless the taxpayer can demonstrate that the  trade in question will likely produce taxable income within a reasonable period.   

The provision specifically targets “suspect trades” - activities that are either frequently loss-making or are specifically listed as one of the eight suspected trades. The goal of the provision is to ensure that tax relief is only granted for genuine business activities and not for ventures structured primarily to minimise tax obligations. 

Changes Introduced in the 2025 Budget Speech 

Identified Loophole 

The current structure of section 20A allows taxpayers below the maximum marginal tax rate (currently 45%) to offset losses against other income, such as remuneration, and can result in the taxpayer receiving refunds in respect of tax paid to SARS on other sources of income (for example, PAYE). This was highlighted by Finance Minister Enoch Godongwana in the 2025 Budget Review as follows: 

“The current application of section 20A of the Income Tax Act enables taxpayers below the maximum marginal rate threshold to exploit the tax system by continuously offsetting losses from certain trades against other sources of income. This creates a loophole that leads to substantial revenue losses for the fiscus, as taxpayers receive full refunds of their employees’ tax when those losses are allowed. It is proposed that the threshold at which ring-fencing rules apply be reviewed and amended.” 

Key Proposed Amendments 

Revision of the Threshold for Ring-Fencing 

National Treasury has proposed an adjustment to the income threshold at which ring-fencing rules apply, preventing lower-income earners from continuously offsetting losses from certain trades against other sources of income. This means that, where taxpayers below the maximum marginal rate conduct a suspect trade, they will need to ensure that they are able to demonstrate that the trade in question has a reasonable prospect of generating taxable income within a reasonable period.  

Impact on Specific Taxpayers 

Individuals engaged in suspect trades who rely on these loss offsets for tax refunds will need to reassess their tax positions. The changes will primarily affect taxpayers who have structured their income sources to benefit from continuous losses. 

Economic Rationale and Benefits 

Prevention of Tax Revenue Erosion: The government aims to close unintended loopholes that lead to significant revenue losses. 

Ensuring Equity in the Tax System: By refining the application of section 20A of the IT Act, the tax system will ensure that relief is granted only where appropriate, promoting fairness. 

Encouraging Sustainable Business Practices: The amendments discourage the establishment of trades that operate primarily for tax relief rather than economic viability. 

Historical Developments of Section 20A of the IT Act 

Over the years, section 20A of the IT Act has undergone several amendments to address emerging risks and refine its application, such as: 

Expansion of the Suspect Trade List 

The original legislation identified a broad category of suspect trades but has since been updated to include new economic activities prone to tax avoidance strategies. 

Sectors such as exotic animal breeding, collectibles, and sports betting have been added as authorities detect trends in persistent loss claims. 

Refinement of Commerciality Tests 

SARS has progressively strengthened the tests that require taxpayers to prove that they carry on their trade on a commercial basis and with a reasonable expectation of profit to avoid ring-fencing. 

This ensures that legitimate business ventures are not unfairly penalised while deterring tax-driven loss claims. 

Application of Changes to Cryptocurrency Trading 

Section 1 of the IT Act broadly defines “trade” to include any business, profession, occupation, or venture. This means that cryptocurrency (“crypto”) trading falls within the definition of a taxable trade if conducted with regularity and with commercial intent. 

The acquisition or disposal of any crypto asset is specifically included as a suspect trade in section 20A(2)(b)(ix) of the IT Act. National Treasury’s proposal to extend the ring-fencing threshold to taxpayers below the maximum marginal tax threshold could impact crypto traders in several instances. 

A crypto trader’s losses may be ringfenced, which could significantly impact individuals who engage in high-frequency or leveraged crypto trading without demonstrating a sustainable profit model. 

In addition, traders must provide evidence that their activities are carried out in a systematic and profit-driven manner. This includes maintaining proper financial records, conducting market research, and showing a structured trading approach. 

Conclusion 

The 2025 Budget Review proposals signal a renewed effort to refine section 20A of the IT Act to prevent the misuse of assessed losses from suspect trades. By revising the ring-fencing threshold, Government aims to strike a balance between legitimate tax relief and the need to protect the tax base. Taxpayers engaged in suspect trades, including crypto trading, must carefully evaluate their tax positions and strategies to ensure compliance will offsetting losses from suspect trads against other sources of income. 

Staying ahead of these changes requires a proactive approach to tax planning. For individuals and businesses navigating the complexities of section 20A of the IT Act, expert guidance is essential in ensuring compliance while optimising tax efficiency. 

Authors:

Jessica Brown, Consultant