Income tax is generally levied on income that is generated or deemed to be generated from a source in Botswana. Accordingly, taxpayers who receive income from multiple revenue streams originating from the same source are generally assessable for tax on the resultant of the consolidated revenue. Conversely, this might imply that a tax loss from one stream may lower any tax payable from the other. However, such is contrary to an employee concurrently generating income from both a business venture as well as employment remuneration. Keep on reading and understand why a business loss cannot be offset against salary, particularly for taxpayers who are employees whilst they also operate a rental enterprise. In this article, words importing the masculine shall be deemed to include the feminine.
In some instances, some employees own multiple residential properties such that they establish a rental business by letting out other properties which they do not utilise. Such circumstances are generally common to owner-managed entities wherein the owner receives a salary from his or her company whilst also enjoying a secondary income from a rental enterprise. Basically, the income tax law provides that in order to determine the tax liability of an employee who also earns income from a business enterprise, the taxable income from all sources of income should be consolidated. In this respect, it might seem plausible to apply the same principle when an individual incurs a tax loss from his or her rental business. Consequently, this would ultimately lower any arising tax obligations. However, in as much as such practise may seem justifiable it is not consistent with the requirements of the law. As a matter of fact, and law, rental tax losses can’t be offset against employees’ emoluments. Let us now have a look at what is prescribed by the law.
The Income Tax Act provides that the deduction of a tax loss incurred during the operation of a business such as rental of premises is restricted and can only be utilised against income from a business and not a salary. In verbatim, the Act provides that, ‘any assessed loss determined by the Commissioner General as incurred by any person in relation to any tax year shall be deducted in ascertaining the chargeable income of such person from a business for a subsequent tax year.’ From the above citation, it is axiomatic that the scope within which a tax loss can be deductible is ring-fenced to ‘income from a business.’ Therefore, it is without question that the avowed income on which a business loss can be offset against is strictly that emanating from a business activity of the same person.
As alluded to above, the same losses prohibited to offset against salary can be used to reduce future taxable income of the same person. Technically, the loss becomes an allowable deduction in subsequent years specifically for business operations of the taxpayer. However, the deduction of tax losses is limited to 5 years from the tax year of establishment. In other words, a loss established in 2022 will fall off in 2027 if it is not absorbed by taxable income generated in between the said years.
It is also key to note that individuals under employment who also run a profitable rental enterprise are liable to tax on the combined revenue. However, any tax loss incurred from the rental business, or any other enterprise is deductible only from business income in subsequent years. By the way, the laws which previously allowed for utilisation of farming losses against salaries were long abolished.
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