The respondent companies traded in arranging and managing discounts for a chain of wholesale and retail supermarket and grocery outlets. On 1 January 1996, they sold their entire business as a going concern to Shoprite Checkers (Pty) Ltd for R21,000,000. During the 1996 tax year, the respondents did not carry on their normal trading activity. They received interest income from the purchase price held in trust and from an investment of R6,000,000 with Absa Bank. They also invested R9,000,000 interest-free in three Namibian companies with a view to developing a similar chain store organization in Angola. The respondents engaged in various activities exploring business opportunities in Angola and seeking to exploit wholesale liquor and firearm licences not sold to Shoprite Checkers, but no contracts were concluded and no income was earned from these activities. The respondents had accumulated assessed losses from previous tax years and sought to carry forward and set off these losses against the interest income earned during 1996. The Commissioner disallowed the set-off on the ground that the taxpayers did not carry on any trade and did not generate any income from trade in 1996.
The appeal was allowed with costs. The order of the full court (Orange Free State Provincial Division) was set aside with costs. The order of the income tax special court was set aside and replaced with an order dismissing the appeals. The Commissioner's tax assessments for 1996 were upheld.
For the purpose of setting off assessed losses under s 20(1) of the Income Tax Act No 58 of 1962, there must be a connection between the trade carried on by the taxpayer and the income received. Set-off is only admissible against income derived from carrying on a trade. Merely deriving income from investments does not establish that a company carries on the business of an investment company. The taxpayer bears the onus of establishing: (a) that set-off is admissible against income derived from trade; and (b) that the balance of assessed loss has been carried forward from the preceding year. Interest income from investments is not, in ordinary circumstances, income derived from carrying on a trade within the meaning of the Act.
The Court expressly declined to decide the question left open in SA Bazaars (Pty) Ltd v Commissioner for Inland Revenue - whether set-off can operate if a trade is carried on but no income is derived from it. Jones AJA stated (at para 9) that in light of the wording of s 20(1) and s 11(a) of the Act, the concession made by the respondents' counsel on this point may have been correctly made, but preferred to say no more on the point as no argument to the contrary had been placed before the Court and the point had not been given the consideration which contrary argument would require. The decision was based on the concession made.
This case clarifies the requirements for setting off assessed losses under s 20(1) of the Income Tax Act No 58 of 1962. It establishes that there must be a nexus between the trade carried on and the income received for set-off to be permitted. The case reinforces the principle from SA Bazaars (Pty) Ltd v Commissioner for Inland Revenue that set-off is only admissible against income derived from trade. It also provides guidance on what constitutes carrying on the business of an investment company, holding that merely deriving income from investments does not, without more, establish that a company carries on the business of an investment company. The case is significant for its treatment of the relationship between trading activities and investment income in the context of assessed loss set-offs.