The trade requirement is obsolete for tax purposes
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ARTICLE
The trade requirement is obsolete for tax purposes
Author: Thabo Legwaila
ISSN: 1996-2177
Affiliations: Professor of Law, University of the Witwatersrand
Source: South African Law Journal, Volume 142 Issue 1, p. 99-128
https://doi.org/10.47348/SALJ/v142/i1a7
Abstract
The Income Tax Act 59 of 1962 requires that a taxpayer should be carrying on a trade to be able to deduct expenses in terms of the general deductions formula, to deduct interest in terms of the specific provisions applicable to interest, or to set off assessed losses. The meaning of ‘trade’ has been the subject of many court cases. These cases have assigned varied and divergent meanings to the term ‘trade’. The result has been that it has become a complex term that complicates the deductibility rules without adding much value to the rules. This article considers this trade requirement’s continued relevance and importance and concludes that it is obsolete and ineffective, and adds no value to the deductibility provisions. The essence of the trade requirement is a duplication of the ‘production of the income’ requirement in the general deduction formula. It is also too broad for interest deductibility provisions, meaning that it lacks effect and is too restrictive in the assessed losses provisions. This disadvantages struggling businesses. The article recommends removing the trade requirement from the Income Tax Act.