Section 20A Ring-Fencing of Losses
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What the 2026 Amendment Means for You
1. What Section 20A Does
Section 20A of the Income Tax Act 58 of 1962 prevents individuals from using repeated losses from certain “suspect” or hobby-type trades to reduce their overall taxable income.
If your taxable income (before losses) places you in the top marginal bracket (45 %), and you have incurred losses from a trade in three of the last five years, those losses are generally “ring-fenced.”
This means you cannot offset them against salary or investment income — they may only be carried forward and set off against future profits from that same trade.
Typical “suspect trades” include:
- Farming or animal-breeding on a small scale;
- Performing or creative arts, sport, or collectibles;
- Rental of holiday accommodation or aircraft; and
- Other ventures that have historically produced losses.
SARS applies this provision to ensure that taxpayers claiming business losses are genuinely engaged in profit-oriented commercial activities and not subsidising personal or lifestyle pursuits.
2. What the Proposed Amendment Does
In the 2025 Draft Taxation Laws Amendment Bill (TLAB), National Treasury proposes to lower the income threshold for application of Section 20A.
Currently, the rule applies only to taxpayers whose pre-loss taxable income is at the 45 % marginal rate (≈ R 1.8 million for the 2026 tax year).
The draft amendment would reduce this threshold to R 673 000, capturing individuals in the 36 % bracket and above.
In effect, many professionals, executives, and high-income earners with “side businesses” (for example, short-term rentals, farming ventures, or trading activities) will fall within scope.
The proposed effective date is 1 March 2026, meaning the 2027 year of assessment will be the first affected year — but advance planning is essential.
3. Is the Amendment Law Yet?
Not yet.
As of November 2025, the draft amendment remains before Parliament and has not been enacted. The current rule therefore still applies — i.e., only top-rate taxpayers are affected.
However, Treasury has clearly signalled its intent to broaden the rule, so prudent taxpayers should prepare now.
4. Practical Impact and Planning Steps
If you have, or are considering, a side business or investment activity that may produce losses, it’s important to:
- Review your trade’s nature: Is it on the “suspect list,” or could SARS argue it lacks commercial substance?
- Document your profit motive: Maintain a business plan, budgets, marketing, and trading records to demonstrate an intention to earn taxable income.
- Monitor the three-out-of-five rule: If losses have arisen in three of the last five years, you may already be within the ring-fence.
- Project your income level: If the amendment becomes law, taxpayers with income above ± R 673 000 will be affected.
- Consider restructuring: Where possible, group multiple ventures commercially or reconsider personal ownership vs. company ownership to optimise ring-fencing exposure.
5. Our View
Section 20A has always targeted “hobby-loss” claims by very high-income individuals.
However, the proposed amendment represents a significant policy shift — broadening the rule to middle-to-upper-income taxpayers. It reflects SARS’ increased scrutiny of side-business deductions and lifestyle ventures.
Taxpayers should therefore assume the wider rule will be enacted and begin aligning their documentation and expectations accordingly.
