Ring-fencing is a very important tax terminology for businesses to understand. It is a practice in which losses from one part of a business cannot be used to reduce the taxable income from another more profitable part, ensuring that each part of the business pays its fair share of taxes based on its actual profits. It is often applied in tax regulations to prevent businesses from using losses in one area to offset profits in another, thereby reducing overall tax liability.

The Namibian Tax Law

This requirement is particularly relevant in Namibia, where Section 21A of the Income Tax Act 24 of 1981, (the Act), guides the definition of ring-fencing restricting the ability to offset assessed losses from certain trades against other unrelated income streams. This provision ensures that tax liabilities reflect the actual profitability of distinct business operations without being diminished by losses from other activities.

In Namibia, ring-fencing is commonly applied in industries falling within the definition of ‘suspect trades’, where individuals might have multiple operations at different stages of profitability.

Section 21A of the Income Tax Act 24 of 1981, (the Act) guides us by the definition depending on various circumstances apply during any year of assessment in respect of any trade carried on by a natural person, any assessed loss incurred during that year in carrying on such trade may not be set off against any income of the person derived during that year otherwise than from carrying on such trade.

What are ‘Suspect Trades’?

Ring-fencing of assessed losses in Namibia applies specifically when a person's total income, before considering any losses, is N$200,000 or more in a year. Additionally, it applies under two circumstances: if the person has reported losses in at least three out of the past five years, or if the losses come from certain types of activities known as "suspect trades." These trades include:

• any sport practised by the person

• any dealing in collectables by the person

• the rental of residential accommodation unless at least 80 per cent of the residential accommodation is used by persons who are not relatives of the person for at least half of the year of assessment

• the rental of vehicles, aircraft or boats unless at least 80 per cent of the vehicles, aircraft or boats are used by persons who are not relatives of the person for at least half of the year of assessment

• animal showing by the person

• farming or animal breeding unless the person carries on farming, animal breeding or activities of a similar nature on a full-time basis

• any form of performing or creative arts practised by the person, or

• any form of gambling or betting practised by the person.

Exceptions When Ring-Fencing Does Not Apply

However, there are exceptions where ring-fencing does not apply. If the trade shows a reasonable prospect of generating taxable income soon, losses from that trade may still offset other income. This determination considers several factors such as the income versus expenses ratio, the level of business activities, how commercially the trade operates (e.g., number of employees, business premises, equipment used, and time spent by the owner), historical losses, business planning efforts, and whether assets are used for personal reasons.

In cases where a person has reported losses for six out of the last ten years in any of these suspect trades, ring-fencing still applies regardless of the prospects of future profitability. Moreover, despite general rules, all farming activities by a person are considered a single trade for ring-fencing, emphasising the special status farming holds under this tax regulation.

What Businesses Need to Consider

Namibian businesses need to take care in considering the applicability of ring fencing to their operations. The diagram below depicts the key considerations from the Act that you can apply as a rule of thumb:

Use CIBA’s attached Framework to Assess the Applicability of the Ring-Fencing Requirement in Namibia and ensure your clients comply with the provisions.