South Africa: Proposal to limit use of losses by companies

New rules relating to the use of assessed losses by companies are proposed

New rules relating to the use of assessed losses by companies are proposed

The “Taxation Laws Amendment Bill 2021” (released 11 November 2021) proposes new rules relating to the use of assessed losses by companies.

The effective date of the proposed changes would be aligned with the date when the corporate income tax rate is reduced, and would apply in respect of years of assessment beginning on or after that date. 

Summary

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

As part of the proposal to broaden the corporate income tax base, the bill would limit the set-off of any balance of assessed losses to an amount not exceeding the greater of R1 million or 80% of taxable income before applying the set-off. The proposal would result in taxpayers with taxable income in excess of R1 million being subject to tax on a minimum amount equal to 20% of their taxable income calculated for any year—regardless of the amount of any assessed loss brought forward.

The balance of any unused assessed loss would be available to be carried forward, subject to the new 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 excess of R1 million in any particular year, tax would be due and payable on 20% of that taxable income—with only 80% of the taxable income capable of being set-off against any available assessed loss.

Read a November 2021 report [PDF 616 KB] prepared by the KPMG member firm in South Africa

 

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