New rules for Company assessed losses!
The rate for annual corporate assessed losses carried forward
from previous years has been lowered.
Section 20 of the Income Tax Act allowed, in most circumstances, for taxpayers carrying on a trade to set off assessed losses brought forward from prior years of assessment against taxable income in the current year of assessment.
Unfortunately, the Taxation Laws Amendment Act of 2021 has restricted how these losses can now be applied.
The rationale for this amendment was to create the fiscal space to allow for a proposed reduction in the corporate tax rate from 28% to 27%.
The reduction in the corporate tax rate was seen as necessary to improve South Africa’s competitiveness, promote foreign investment and economic growth, and reduce drivers towards base erosion and profit shifting.
The proposal was enacted in terms of the Taxation Laws Amendment Act of 2021 and came into effect for years of assessment ending on or after 31 March 2023.
It only applies to companies that have incurred an assessed loss in a previous year of assessment and states that the set-off of such assessed loss carried forward against current year taxable income may not exceed the higher of R1 million or 80 percent of the current year taxable income before the application of the set-off.
The main points to note are as follows:
The rule only applies to companies. Therefore, other taxpayers such as individuals and trusts are not affected and may, as before, fully set off assessed losses carried forward from previous years of assessment against taxable income earned in the current year.
The rule first applies to years of assessment ending on or after 31 March 2023. In the case of a 12-month year of assessment, this, therefore, means that it will apply to years of assessment commencing on or after 1 April 2022.
The rule does not apply to assessed capital losses, which in most cases remain fully available for set-off against capital gains.
If the current year’s taxable income before the set-off of the assessed loss is R1 million or less, then the assessed loss brought forward may be fully set off against the taxable income. The R1 million minimum threshold was introduced to provide relief for companies experiencing cash flow challenges.
In the case of mining companies, the legislation has been clarified to state that the deduction of the section 36 mining capital expenditure is calculated after the set-off of the assessed loss. The balance of unredeemed capital expenditure will then be carried forward to the following year of assessment.
If the current year’s taxable income calculation results in an assessed loss before taking into account an assessed loss carried forward from the previous year of assessment, then the rule does not apply. In such a case, the full amount of the current year’s assessed loss is added to the previous year’s assessed loss and the entire balance of assessed loss is carried forward to the following year of assessment.
As before, a company may only set off an assessed loss against income derived from a trade. Therefore, if a company does not carry on a trade at all during a year of assessment, it will not be able to carry forward an assessed loss from a previous year of assessment to the next year of assessment. In these circumstances, this assessed loss will therefore become lost to the company.
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