29 April 2022
SNG Grant Thornton
To print this article, all you need is to be registered or login on Mondaq.com.
The provisions of section 20 of the Act provides that taxpayers
can set off their balance of assessed losses carried forward from
the preceding tax year against their income in determining taxable
income.
Any unutilised assessed loss balance may be carried forward to
future years of assessment to be set off against future income.
This means that a taxpayers will only be liable to paying income
tax only when they have earned a taxable profit and their assessed
loss balance is exhausted.
In the 2020 Budget announcement, National Treasury made a
proposal to broaden the corporate income tax base by restricting
the offset of the balance of assessed losses carried forward to 80
per cent of taxable income.
National Treasury indicated that the proposal will apply to the
balance of assessed losses available at the time of implementation
of the proposed amendment. This will contribute to providing the
fiscal room for government to lower the corporate tax rate. The
effect of the proposed restriction is that only companies that
would be in a positive taxable income position before setting off
the balance of assessed losses would be affected.
On the 19th of January 2022 government published in the
Government Gazette the Tax Law Amendment Act no. 20 of 2021, in
which the proposal in the 2020 Budget speech relating to the
limitation of assessed loss balances by corporates when determining
taxable income, were made into law. Section 18 of the Tax Amendment
Act No:20 of 2021 states that section 20 of the Income Tax Act, is
amended in such manner that a company is allowed to deduct from
taxable income any balance of assessed loss incurred by that person
in any previous year which has been carried forward from the
preceding year of assessment, to the extent that the amount of such
set-off does not exceed the higher of R1 million and 80 per cent of
the amount of taxable income determined before taking into account
the application of this provision.
The new provision means that to the extent that the balance of
assessed loss exceeds 80 per cent of current taxable income,
companies will be able to deduct the higher of R1million or 80 per
cent of taxable income.
To illustrate the impact of the new provision, please refer to
the example below relating a company:
The example above indicates that when applying the old provision
in section 20 of the Act, in both year 1 and year 2 the company
will not be liable to paying any tax amount as the assessed loss
exceeds the taxable income in year 1 and is equal the taxable
income in year 2.
However, under the new provision of section 20, in year 1, the
assessed loss that will be allowed as deduction will be limited to
80% of the taxable income of R500. As a result, only R400 will the
amount of the assessed loss that will be deducted from taxable
income resulting in taxable income of R500. As a result, only R400
will the amount of the assessed loss that will be deducted from
taxable income resulting in taxable income after assessed loss of
R100 and income tax payable of R28.
Similarly, in year 2 the assessed loss deductible will be
limited to R480 (80% of R600) resulting in taxable income of R120
and tax payable of R34.
This amendment to section 20 of the Income Tax Act is effective
for companies with years of assessment ending on or after 31 March
2023. The above change will not only impact on taxable income for
the years of assessment post the effective date but will impact
recognition of deferred tax asset in relation to the assessed loss
prior the effective date.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
POPULAR ARTICLES ON: Tax from South Africa
Tax In Brief | Issue 79
ENSafrica
Below, please find issue 79 of ENSafrica’s tax in brief, a snapshot of the latest tax
developments in South Africa.