Treasury wants to slash ring-fencing threshold for ‘suspect’ trades

South Africans augmenting their income with a side hustle should take note of a proposed change to the threshold for ring-fencing of assessed losses from such trades.

Currently, the threshold for ring-fencing applies to taxpayers who fall within the highest income tax bracket of 45%, or R1.817 million for the 2026 tax year. National Treasury now wants to slash it by almost a third, to R673 000.

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The proposal forms part of the draft Taxation Laws Amendment Bill (TLAB), which gives effect to the announcements made in Finance Minister Enoch Godongwana’s 2025 Budget Review.

Cliffe Dekker Hofmeyr says section 20A of the Income Tax Act (the ring-fencing mechanism) was first introduced to prevent individuals from continuously offsetting losses from certain trades against other sources of income, thereby reducing their overall tax liability.

Reduced tax liability

“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 firm said at the time of the announcement in March.

The ring-fencing mechanism targets activities that are either frequently loss-making or specifically listed as one of the suspected trades.

The goal of the provision is to ensure that tax relief is only granted for genuine business activities, rather than for ventures structured primarily to minimise tax obligations. Once the mechanism is applied, losses may only be offset against future income from the same trade – not against other income, such as a salary.

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The South African Revenue Service (Sars) considers activities such as sports or creative arts practiced by the taxpayer or a relative, gambling or betting, dealing in collectibles such as art or coins, animal breeding and farming (unless undertaken full-time), rental of personal assets and dealing in cryptocurrencies as suspect.

This section aims to prevent taxpayers from disguising hobbies or lifestyle ventures as businesses, allowing them to reduce taxable income by deducting expenses from these activities.

Top marginal rate

Treasury says in its explanatory memorandum of the draft TLAB, that taxpayers who are taxed “only below” the top marginal tax rate are increasingly using strategies to claim losses from suspect trades in order to reduce their taxable income.

Currently, the ring-fencing applies to taxpayers taxed at the top marginal tax of 45%, where losses were incurred in at least three of the preceding five tax years, or where the trade falls within the list of so-called “suspect” activities.

With a lower taxable income threshold of R673 000, the ring-fencing will apply to more taxpayers, thereby closing tax avoidance by some individuals earning just below the maximum tax bracket. “These changes will enhance compliance and protect the integrity of the tax base,” Treasury says in the memorandum.

PwC tax partner Kyle Mandy says they understand the reasoning behind the proposed change. In essence, what is targeted are such things as hobbies or the use of holiday homes that are not operated as serious business ventures.

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However, relief remains available where it can be demonstrated that there is some prospect of deriving taxable income from the trade within a reasonable period.

Mandy says that, because ring-fencing is currently tied to the income level at which the top marginal tax rate applies (R1.817 million), it has effectively undermined the impact of the ring-fencing mechanism.

New threshold too low

“However, we do think that applying the ring-fencing mechanism at a level of R673 000, as proposed, is a little low. We would like to see this more closely aligned with the 41% tax rate, which is the second highest marginal tax rate at a level of around R850 000.”

Independent tax advisor and founder of Fintax, Pieter Botha, says government is clearly desperate for additional tax revenue. Although it is understandable why Treasury wants to widen the net, it is also obvious why there is an increase in loss-making trading activities.

“In an environment where there is no economic growth, it is inevitable that people will be making losses,” he notes.

Mandy says, in light of the proposed change, taxpayers should maintain full and proper financial records, evidence of the trade being carried on in a business-like manner, as well as forecasts and business plans for future years.

“In essence, taxpayers should maintain sufficient evidence to discharge the onus of the trade becoming profitable within a reasonable period.”

The effective date for the proposed change is 1 March 2026. The draft TLAB was published on 16 August, and affected parties must submit comments on the proposed amendments by 12 September.

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