Analysis of "commencement of trade" and "cessation of trade" as applied in the context of income tax in South Africa
In income tax legislation, it is of crucial importance to be able to determine a precise time at which an entity can be said to have commenced and ceased trading. This is due to the fact that in so far as tax on income is concerned, by its very nature, it is a tax that mainly depends on trade, and the tax events that become relevant in terms of deductions and allowances in particular, need to take place within the context of trade.1 In essence, in order for a tax event or an expense to have any application for the purposes of income tax (as opposed to capital gains, or other non-revenue taxes) it must take place between the times after an entity has commenced trading, and before it has ceased trading.2 As will be shown, this is so stringently applied, that it can lead to unfairness with regards to certain pre-trade revenue expenses, so much so, that in 2003, the Income Tax Act was amended to include an exception for such expenses in the form of section 11A. An assessment of when a business commenced and ceased can also be relevant in many other areas other than in relation to deductions and allowances, such as in the provisions relating to value added tax, in determining an appropriate tax period for an entity, and in many other instances. It is also relevant in many areas outside of the field of tax. However, despite the relevance of this issue, and despite the fact that one would have expected the issue to have received judicial attention, there is in fact a paucity of jurisprudence both locally and internationally on the issue of commencement of trade.
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