Losses from extra income ring-fenced in Namibia
Losses from extra income ring-fenced in Namiba
As is already the case in South Africa, individual taxpayers in Namibia should be cautious when claiming losses of trades outsides normal employment, as the effects of ring-fencing may be substantial.
According to PwC in Namibia, many individual taxpayers declare their normal salary income with some additional income from other sources, like rental, or a side-line business. To limit their tax liability they then proceed to claim expenditure and losses from these additional activities. “This is exactly where you should be warned – because Inland Revenue now has the power to ring-fence those activities, which may cause significant tax liabilities, penalties and interest,” says PwC in its newsletter.
With the introduction of the ring-fencing legislation in 2012, the warning signs were raised, but did not have an immediate impact. After some years, the impact may start to kick in in 2015. Individuals who will be affected by ring-fencing are natural persons whose taxable income (before the deduction of any assessed losses), equals or exceeds N$200,000 and who either had an assessed loss in at least three out of the last five tax years; or the assessed loss arises from a suspect trade. Individuals whose income is below the set threshold of N$ 200,000 don’t fall within the realm of ring fencing.
The 3/5 years losses test will be affected as from 1 March 2011. Therefore if losses were incurred in the first 3 years out of a 5 year period, as from 1 March 2011, the losses from that trade will be ring-fenced. The 3/5 years test does not only apply to the suspect trades, but to any trade. The legislation stipulates this list of trades, which will be immediately identified as trades which should be ring-fenced for tax purposes.
- Sporting activities;
- Dealing in collectibles;
- Rental of residential accommodation (unless at least 80% of the accommodation is used for at least half the year by non-relatives of the taxpayer);
- Rental of vehicles, aircraft or boats (unless at least 80% of these assets are used for at least half the year by non-relatives of the taxpayer);
- Showing animals in competitions;
- Farming or animal breeding unless the person carries on farming/animal breeding on a full time basis;
- Any form of performing or creative arts; and
- Gambling or betting.
Ring-fencing can be prevented, but only where the trade constitute a ‘business’ and there is a reasonable prospect of profitability within a reasonable period of time; and the trade should generate taxable profits for at least 5 years out of a 10 year period as from 1 March 2011.