Tax effects on assessed loss brought forward limitation

Background

The carryforward of assessed losses by a company is regulated by section 20 of the Income Tax Act 58 of 1962. Currently, a company can carry forward assessed losses indefinitely subject only to the requirement that the company continue to carry on a trade. When the assessed loss carried forward in a particular year of assessment exceeds the taxable income (before set-off of the loss) for the year, the taxable income can be set off in full against the assessed loss.

Proposed changes

As part of the measures to broaden the corporate income tax base, the draft legislation proposes changes to section 20 of the Income Tax Act.

  • In terms of these proposals, companies would only be permitted to set-off the balance of an assessed loss carried forward to the extent that the set-off does not exceed 80% of the taxable income determined for that year (before taking into account the assessed loss).
  • The proposal would result in taxpayers being subject to tax on a minimum of 20% of their taxable income calculated for any year—regardless of the quantum of any assessed loss brought forward.
  • The proposed effective date for the amendment is 1 April 2022, with the amendment being applicable for years of assessment commencing on or after that date.
  • The limitation would apply to assessed losses generated prior to the effective date as well as those arising after 1 April 2022.
    The balance of any unused assessed loss would remain available to be carried forward, subject to the 80% restriction in future years. Taxpayers would be able to add any current year loss to the balance of assessed loss. However, as soon as a company has taxable income in any particular year, tax would be payable on 20% of that taxable income with only 80% of the taxable income capable of being set-off against any available assessed loss.

The introduction of the proposed amendment would be accompanied by a reduction in the corporate income tax rate from 28% to 27% as mentioned in the 2021 Budget Speech. The proposed amendment will come into operation on 1 April 2022 and apply in respect of years of assessment commencing on or after that date. Companies with a year ended 31 March 2023 will potentially be the first companies to be affected by the proposed amendment.

While these specific amendments have not been gazetted yet, taxpayers would need to be aware of these changes and perhaps begin quantifying their potential tax exposures. The proposed amendment would see the balance of assessed losses carried forward being restricted to 80% of taxable income. This would imply that only companies in a taxable income position before the set off of any assessed losses, may be potentially impacted, while companies generating a loss in the current year would not be impacted.

This article was written in collaboration with our partners at Exceed. At Exceed, they integrate specialised professional services with a modern, innovative and dynamic approach. Their services include auditing, accounting, tax, business, financial advisory, recruitment and human resource services facilitated through solid and accessible relationships.

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