Commissioner for the South African Revenue Services v Megs Investments (Pty) Ltd and Another

The respondents were two affiliated companies that previously carried on a profitable trade arranging and managing supplier discounts for retail and wholesale supermarket outlets. They sold this business as a going concern to Shoprite Checkers (Pty) Ltd with effect from 1 January 1996. During the 1996 tax year, they no longer conducted their former trading activities but earned interest income from the purchase price and other investments. They also explored, without success, the possibility of establishing similar businesses in Angola and in the liquor and firearms sectors. They sought to set off assessed losses carried forward from prior years against their 1996 interest income under section 20(1) of the Income Tax Act 58 of 1962. The Commissioner disallowed the set-off on the basis that they did not carry on a trade, nor derive income from trade, during 1996.

The appeal was upheld with costs. The orders of the full court and the income tax special court were set aside and replaced with an order dismissing the taxpayers’ appeals, thereby confirming the Commissioner’s 1996 tax assessments.

The case reaffirms the principle that assessed losses may only be set off against income derived from carrying on a trade, and not against passive income such as interest, unless that income itself is derived from trading activities. It clarifies the strict application of section 20(1) of the Income Tax Act and underscores the requirement of a nexus between the trade carried on and the income against which losses are set off.