An analysis of ring-fencing of tax losses from the perspective of farmers

Abstract

Tax losses claimed from hobby-like or artificially labelled trades have become more problematic during 2002 after the court ruling in the Smith case. The legislator found that the tests laid down by the courts in the application of section 11(a), the carrying on of a trade principle, read together with section 23(g) (expenses which can only be claimed to the extent that they were for trade purposes), were not sufficient to address this problem. Section 20A was introduced to ring-fence these losses through a more stringent test. To escape ring-fencing, a taxpayer must prove that the losses have passed this more stringent ‘facts and circumstances test’. In this study, the application of the ‘facts and circumstances test’ to escape ring-fencing in the case of tax losses from part-time farmers was analysed by considering academic writing, court cases, and other material relevant to the topic. The objective was to analyse the escape clause from ring-fencing to determine whether the legislation set out to achieve the outcome as explained in the Explanatory Memorandum. It was found that the wording, if applied to part-time farming losses, could still be problematic. If a taxpayer formulates a convincing argument, a hobby-like farming loss can possibly escape ring-fencing and a legitimate bona fide part-time farming loss can possibly be ring-fenced. The summary indicates that the wording used in the application to ring-fence part-time farming losses seems to go beyond the intention of the legislature and creates uncertainty in the tax treatment of part-time farming losses.