A business usually relies on the general deduction formula in section 11(a) of the Income Tax Act, 1962 as read with section 23(g) when deducting expenses for tax purposes. In order to claim a deduction under these sections a person must be carrying on a trade. Claiming a deduction of expenditure incurred before the commencement of trade, must be done under section 11A, which allows a taxpayer to deduct expenditure which would have qualified but for the requirement that the business must be trading. The expenditure is deductible in the year of assessment in which trade commences, subject to certain requirements, and irrespective of when the expenses were incurred.
There are four key requirements before pre-trade expenses will qualify as a deduction:
Section 11A(2) provides for a ring fencing of pre-trade expenses. If the pre-trade expenses exceed the taxable income of that trade, the excess pre-trade expenses cannot be set off against the income from any other trade. If any pre-trade expense is not allowed due to insufficient taxable income from a particular trade, the amount can be carried forward and set off against any future taxable income from that trade.
This article has been written by Graeme Palmer, a Director in the Commercial Department of Garlicke & Bousfield Inc