A very common question was raised in the boardroom
last week during a consultation – where does pre-trade expenses end?how far back can I claim expenses before I actually started doing business?

Let’s quickly recap what SARS allows on this topic.

Pre-trade expenses

The general deduction rule stipulates that you can only deduct expenses incurred in the production of income that you may have earned from carrying on a trade. In other words, expenses after you have started to trade.

Section 11 A however does allow you to deduct expenses and losses:

  • that was actually incurred prior to the commencement of and in preparation for carrying on that trade,
  • which would have been allowed as a deduction according to the general deduction rule, had the expenditure or loss been incurred after you commenced that trade, and
  • which haven’t been allowed as a deduction in that year or any previous tax years.

Important note

You may only claim a deduction of pre-trade or preparation expenses once you’ve commenced trading and any losses incurred before you commenced doing business can’t be off-set against any revenue that is derived from another business.

VAT on pre-trade expenses

If your business is reimbursed for the expenses of the goods and services that you would normally use to do business, then it can claim an input tax deduction for the reimbursement.

Ensure that you qualify for this VAT input deduction  by ensuring that:

  • the supply is a taxable supply
  • the goods or services are acquired within six months of the company’s incorporation, and
  • you keep sufficient records of the expenses.

Practical Example

John sells life insurance and carries on business through LifeInsure (Pty) Ltd. John decides to open up another business in the food and beverage industry, by utilising LifeInsure (Pty) Ltd.

  • The food and beverage business  was opened in the 2012 year.
  • The following represents the financial transactions incurred by LifeInsure for the 2011 and 2012 years.
  • John must calculate the taxable income of LifeInsure for 2012

2011 Tax year

Profit from selling life insurance R220,000
Preparation expenses for food and beverage   business:
Advertising R10,000
Telephone R  2,500
Travel   expenses R17,750
Total R 30,250

2012 Tax year

Profit from selling life   insurance R275,000
Food & Beverage Income R610,000
Food & Beverage Expenses (R595,000)
Food & Beverage Profit before   tax R  15,000

Computation of taxable income

2011 Tax Year

2012 Tax Year

Profit from selling life insurance

R220,000

R275,000

Preparation expenses not deductible in 2011 as food & beverage   business did not commence during the year

R Nil

Limited pre-trade expenses

(R15,000)
Note   1

Food & Beverage Profit before   tax

R  15,000

Taxable Income

R220,000

R275,000


Note 1

Any food & beverage pre-trade expenses that exceeds the income earned over the year (calculated after the deduction of allowable amounts), can’t be off-set against the income derived from selling life insurance.

John will have to carry the R15,250 balance of the pre-trade expenses forward to the 2013 tax year. (R30,250 – R15,000)

 

6 Reasons To Look at Your Financial Reports
Making time to look over your financial reports each month is an important task for any business owner. If you are not taking the time to do this, either because you’re too busy, or perhaps you don’t really understand what you’re looking at and it doesn’t make sense to you, then here are 6 reasons […]
Your business deserves proper management accounts
For a moment, let’s think back to when we were kids and started to read for the first time…did we immediately start reading words?   No. it all started with pictures.   There is the age-old saying that reads: “A picture is worth a thousand words”.   Pictures created a visual reference point that over […]
Press Release: ThriveCFO launches debt recovery service
ThriveCFO is proud to announce that they are the first SA Based Accounting Firm that launches its very own, fully integrated debt management and collection service – Ultradebt (Pty) Ltd Having spent the last 6+ years in the corporate world and implementing different debt collecting methods & processes for these organizations, it was evident that […]

Become a Thriver. It will only take a minute.

No responses yet

Leave a Reply

Your email address will not be published.