Tax Planning
Navigating South Africa’s Ring-fencing of Losses: What Individuals Should Know
Understanding how section 20A’s recent changes impact taxpayers who repeatedly incur trade losses, especially after the marginal rate threshold was lowered.
By NomadicTax Research Team • 5-8 min read • August 27, 2026
## What is Section 20A Ring-fencing?
Section 20A of the Income Tax Act in South Africa addresses the **ring-fencing of assessed losses** for individuals conducting certain trades. Previously, losses from those trades could be offset against other income (e.g., salary or investment income), but under ring-fencing, these losses can only be carried forward and offset against future income from the same trade. For example, someone operating a rental business or creative enterprise would use losses in that trade only when that same trade makes income. ([sars.gov.za](https://www.sars.gov.za/wp-content/uploads/Ops/Guides/LAPD-IT-G04-Guide-on-the-Ring-Fencing-of-Assessed-Losses-Arising-from-Certain-Trades-Conducted-by-Individuals.pdf?utm_source=openai))
## Key Change as of 1 March 2026
For years of assessment starting **on or after 1 March 2026**, the threshold that triggers this ring-fencing has been lowered. Now, assessed losses can be ring-fenced when a taxpayer’s marginal tax rate reaches **39%**, rather than the previous benchmark of the maximum marginal rate (45%) of tax. This means **more taxpayers** with higher incomes may be affected. ([sars.gov.za](https://www.sars.gov.za/whats-new-at-sars/6/?utm_source=openai))
### Summary of Conditions
To determine whether ring-fencing applies, the following must be satisfied:
* Step 1: The taxpayer’s **adjusted taxable income** (income plus assessed losses and previous carry-forwards) must reach the income level at which a 39% marginal rate applies. ([sars.gov.za](https://www.sars.gov.za/whats-new-at-sars/6/?utm_source=openai))
* Step 2: Either:
* the “three-out-of-five-years” test (losses in 3 of last 5 years), or
* trade is listed as a ‘suspect trade’ (such as renting vehicles, creative arts, farming part-time, etc.) under section 20A(2)(b). ([sars.gov.za](https://www.sars.gov.za/wp-content/uploads/Ops/Guides/LAPD-IT-G04-Guide-on-the-Ring-Fencing-of-Assessed-Losses-Arising-from-Certain-Trades-Conducted-by-Individuals.pdf?utm_source=openai))
* If those are met—and the taxpayer does not demonstrate a reasonable prospect of making taxable income from the trade in the near term—ring-fencing kicks in. ([sars.gov.za](https://www.sars.gov.za/wp-content/uploads/Ops/Guides/LAPD-IT-G04-Guide-on-the-Ring-Fencing-of-Assessed-Losses-Arising-from-Certain-Trades-Conducted-by-Individuals.pdf?utm_source=openai))
## Practical Impacts & Examples
| Type of Taxpayer | Scenario | Effect of the Change |
|------------------|----------|-----------------------|
| High-Income Creative Freelancer | Freelancer makes R1 million income subject to 39% rate, also generates losses from creative trade in 3 of past 5 years | Losses from the creative trade **must** now be ring-fenced—cannot offset against salary income. |
| Part-time Farmer with Lower Income | Farmer with income below the 39% threshold, no losses in many past years | Ring-fencing does not apply—losses can still offset other income. |
## Actionable Advice for Taxpayers & Advisors
* **Check your marginal tax rate**: Look at your 2025/26 and upcoming 2026/27 assessments—are you paying or projected to pay ≥ 39%? If so, ring-fencing may soon affect you.
* **Maintain loss records by trade**: Keep good details showing how losses relate to specific trades—as trader activities in multiple niches might be treated separately.
* **Review your history**: If you had losses in 3 of the 5 years for a trade, start modeling out how ring-fencing would affect your tax liability.
* **Plan for income generation**: To avoid having losses go unused for many years, consider strategies to ensure at least some income arises from the trade—possibly adjusting scale, seeking contracts, or modifying business model.
* **Consider trade classification**: If your activity is borderline (e.g., creative arts, partial farming, rentals), evaluate if shifting status (e.g., corporate structure or full-time dedication) changes your treatment.
## Why This Change Matters for Compliance & Planning
* **More widespread impact**: By lowering the trigger threshold, more individuals are drawn into the ring-fencing regime.
* **Cash flow & tax liability shifts**: Ability to offset losses immediately against other income decreases, raising net taxable income and possibly withholding, provisional tax demands, or PAYE liability changes.
* **Strategic adjustments**: For those in suspect trades, integrating multiple income streams, formalizing operations, or changing business structure might be necessary to optimize tax outcomes.
**Bottom line**: If you’re an individual with trade losses and a higher income, section 20A demands careful planning. Understand your income levels, track your losses per trade, and evaluate whether ring-fencing will reduce opportunities to offset non-trade income.
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Author: NomadicTax Research Team Category: Tax Planning ReadTime: 5-8 min TaxHome: Africa