Tax and SARS knowledge base
Can a repeated loss-making hobby be claimed against salary income?
Can a repeated loss-making hobby be claimed against salary income?
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Direct answer
A repeated loss from an activity cannot simply be set off against salary because the taxpayer calls it a business. SARS's Taxation in South Africa guide explains that whether an activity is a trade depends on the facts and profitable intention, and that section 20A can ring-fence assessed losses from certain individual trades. The starting point is therefore whether the facts show a genuine trade, whether an allowable assessed loss exists, and whether a specific limitation applies.
SARS's current filing questionnaire identifies conducting a trade as a relevant ITR12 question. That makes proper records important, but it does not decide the more difficult question of whether a loss may reduce income from employment. A recurring-loss claim needs a careful factual and legal review before it is put into the return.
What this means in practice
Start with the activity, not the result. A taxpayer who buys equipment, sells a few items and makes a loss for several years may be building a commercial trade, may be in a start-up phase, or may be paying for a hobby. The answer comes from the complete evidence: what is sold, how customers are sought, the time committed, pricing, records, business plan, separate banking, intention to make a profit and the reason losses continue.
Salary records are separate from an activity's records. An IRP5 may show employment remuneration, but it does not create a right to use an unrelated loss against that remuneration. Equally, a genuine trade does not automatically mean every cost is allowable. Private, capital, mixed and unsupported expenses remain risks. The taxpayer needs a defensible route from the underlying records to the figures on the return.
Do not build the claim around an informal label. A photography project, breeding activity, online channel, craft business or weekend food venture can change character over time. Keep a dated account of the commercial steps taken, including price changes, advertising, clients, stock, licences and changes made to address losses. That evidence is more useful than a conclusion written at filing time.
Step-by-step
- Create a yearly activity file.
Include all invoices, sales records, bank entries, customer communications, advertising, stock or equipment records and a short plan for earning income.
- Separate private enjoyment.
Identify costs that would have been incurred personally, even without the activity. Do not claim them merely because the activity has a social-media page or trading name.
- Reconcile the accounts.
Match gross receipts and costs to the bank and payment records. Keep a schedule showing how the annual profit or loss was calculated.
- Check the commercial story.
Record the services or goods offered, customers, pricing, marketing, hours spent, repeat sales and practical steps to reach profitability.
- Identify special risks.
Repeated losses, substantial personal use, a loss against mainly salary income, unusual deductions and incomplete records need professional review before filing.
- Complete the current ITR12 only after review.
SARS publishes the current ITR12 resources through its Personal Income Tax pages. Do not rely on an older screen shot or a past return.
Documents and records to keep
- Annual income and expense schedule, invoices, receipts and proof of payment.
- Bank, payment-platform and cash records reconciled to the schedule.
- Customer orders, contracts, marketing material and correspondence.
- A business plan or contemporaneous notes showing the commercial purpose.
- Asset, stock, mileage and private-use records where relevant.
- The submitted ITR12, assessment and all supporting documents. SARS says return support should be retained for at least five years.
Important limits and exceptions
There is no safe shortcut that turns every loss-making activity into a deductible trade. SARS's guide says section 20A applies after the ordinary deduction rules have been considered and can limit set-off of a qualifying assessed loss against other income. Characterising the activity, considering applicable loss-limitation rules and determining which expenses qualify are separate questions. Do not use this guide to calculate a loss, claim depreciation, or determine VAT or provisional-tax obligations.
If the activity has generated losses for more than one year, has a significant personal element, or would produce a material reduction in salary tax, obtain tailored advice. TaxProof can organise the evidence and explain the return workflow, but the tax position must follow the taxpayer's actual facts.
When to get tailored advice
Seek advice before filing where losses are repeated, the activity began as a hobby, assets have mixed use, records are incomplete, or the claim will offset employment income. Bring the annual schedules and primary documents, not only a total.