Decreased Tax Rates & Restricted Assessed Loss Utilisation
Currently, section 20 of the Tax Act enables taxpayers to utilise the balance of their assessed losses from the preceding tax year, against their current...
Currently, section 20 of the Tax Act enables taxpayers to utilise the balance of their assessed losses from the preceding tax year, against their current taxable income. Accordingly, taxpayers will only be liable for income tax once they have earned a taxable income and their assessed loss balance has been depleted.
The rules have been amended and consist of a decrease in the tax rate as well as limiting the utilisation of tax losses. Below we highlight the implications of the amendments that will apply to all companies and close corporations, referred to below as “company or business”.
What is the effective date of the proposed amendments?
The new rules apply to any year of assessment that ends on or after 31 March 2023, which means years of assessment that begin from 1 April 2022 onwards.
What do the proposed amendments entail?
- Decrease in the corporate income tax rate from 28% to 27% with effect from years of assessment commencing on or after 1 April 2022.
- Restricting the utilisation of assessed losses against taxable income with effect from years of assessment commencing on or after 1 April 2022.
What does this mean?
Change 1: Reduction in the corporate income tax rate – from year ends starting 31 March 2023 and onwards, taxation payable will be calculated at 27% and not 28%.
Change 2: Limiting utilisation of assessed loss – the balance of assessed losses allowed to be deducted against the income derived by a company during such year will be limited to: • A balance of assessed loss o Incurred by such a company in any previous year o That has been carried forward from the preceding year of assessment o To the extent that the amount of such set-off does not exceed the higher of R1 million, or 80% of taxable income before taking into consideration any previous balance of assessed loss.
This limitation would apply to assessed losses generated prior to the effective date as well as any assessed losses arising after the effective date.
The balance of any unused assessed losses, arising due to the limitations above, would remain available to be carried forward.
The relief provided: a company with a taxable income of less than R1m, will not be impacted by the assessed loss restriction and may deduct the full balance of their assessed loss.
Practical implications of Change 2?
The assessed loss limitation will have no impact on the business if:
- The business has a taxable loss for the year; or
- The business does not have any assessed losses from the prior year that it would like to carry forward to this year; or
- If the business has a taxable income of less than R1m.
The assessed loss limitation will have an effect on the business if it:
- Has a taxable income larger than R1m; AND
- There is a prior year assessed loss that can be deducted this year. This means that:
- The prior year assessed loss that may be deducted will be limited to the larger of R1m or 80% of the taxable income for the current year; and
- The amount of the assessed loss that was not deductible as per this limitation, will be carried forward to the next financial year and will therefore not be disqualified from utilisation in future.
How to address the amendments?
We recommend that the above-proposed amendments be taken into consideration when calculating income tax payable as well as determining the estimates for provisional taxes. We also recommend that a conservative approach be applied when estimations are performed, especially if the taxable income estimation is in the region of the R1m threshold.
Real Time accounting will be able to assist with the necessary considerations, preparation, and execution of the required steps.
If you have any questions concerning the above or require assistance in this regard, please feel free to reach out to your Account Manager.