Ring fencing is where a taxpayer may not offset losses from certain trades against income from other trades, or employment income in future years. In Namibia ring-fencing only applies to natural persons with taxable income of more than N$200,000 per year (excluding any losses). This amount is usually the income from normal employment.
Where a person earns additional income from other trades, and losses are made from these other trades, you should consider whether the losses are deductible against your normal salaried income. The simplest way to determine whether you can deduct the losses or whether the losses are ring-fenced is to follow the simple decision diagram below:
When are losses ring-fenced?
The first step is to determine is the specific trade from which you are making losses is listed under the "suspect trades", which are:
dealing in collectibles;
rental of residential accommodation, (where the accommodation is leased to a relative for more than 6 months in a tax year, and the relative occupies more than 80% of the property)
rental of vehicles, aircraft and boats, (where the asset is used by a relative for more than 6 months in a tax year, and the relative uses more than 80% of the asset)
farming or animal breading unless carried on full time basis;
carrying on of creative arts;
Gambling or betting.
The second step is to determine if the trade (irrespective if it is a 'suspect trade' as above or not), is incurring losses for at least 3 out of 5 years, starting from 1 March 2011. If this is the case, then the losses are automatically ring-fenced.
The Escape hatch
If you determined that your losses should be ring-fenced from the above steps, an escape hatch is still available to all taxpayers. However please note that you will have to meet ALL of the below requirements, before you can claim the losses, AND bear in mind that Inland Revenue may require documented proof of the below before they may allow the claim.
Ring fencing of trades could be avoided where a taxpayer can prove that: 1. The trade constitutes a business with a reasonable prospect of being profitable within a reasonable time period; (Special consideration will be made on the following)
The proportion of the gross income in relation to the amount of the allowable deductions incurred;
The level of activities carried on by the person or the amount of expenses incurred by the person in respect of advertising, promoting or selling in carrying on the trade;
Whether the trade is carried on in a commercial manner, taking into account number of employees, trade premises, equipment used, time spent on premises of business;
No. of years of assessment during which assessed losses were incurred in carrying on the trade in relation to the period from the date when the person commenced carrying on the trade taking into account:
any unexpected events giving rise to any of those assessed losses; and
The nature of the business involved.
The business plans of the person and any changes thereto to ensure that taxable income is derived in future trade;
The extent to which any asset attributable to the trade is used, or is available for use, by the person or any relative of the person for recreational purposes or personal consumption.
AND 2. The trade will generate profits for at least 5 years out of a 10 year period starting from 1 March 2011.
If after all of this youe relaise that your losses are not deductible and the losses should be ring-fenced, all you need to do, is to take out the losses deducted in your tax return/tax calculation, therefore not decreasing your taxable income.
Please note the onus is on the taxpayer to declare the income corretly and if you claim losses which should have been ring-fenced, Inland Revenue has the right to assess the return differently. This often results in additional penalties and interest on late payment of taxes.