When determining a taxpayer’s taxable income, section 20 of the Income Tax Act 58 of 1962 allows for the set-off of the balance of assessed losses carried forward from the preceding tax year against income. In other words, if a taxpayer does not use an assessed loss, it may be carried forward (provided the taxpayer’s trade continues without interruption) to be set-off against future income. A taxpayer therefore only becomes liable for tax once the assessed loss balance has been depleted and a taxable profit earned.
In the draft Taxation Laws Amendment Bill, 2021 a change to the assessed loss rule is proposed. According to the proposal, the set-off of the balance of assessed losses carried forward will be restricted to 80% of taxable income. The new law will apply to the balance of assessed losses at the time that it is implemented. This means that it will apply, not only to the accumulation of losses starting from the implementation of the law on 1 April 2022, but losses accumulated in previous years.
The effect of the proposed rule is that only taxpayers that are in a positive taxable income position before setting off the balance of assessed losses will be affected. For example, a taxpayer with a taxable income of R5,000 before setting off accumulated losses of R4,750, will be subject to the new rule, as the losses constitute 95% the current year taxable income, exceeding the proposed 80% restriction. This means that the taxpayer will be limited to set-off R4,000 (80% of R5,000) against its taxable income, with the balance of R750 carried forward to the following year. If the taxpayer was a company, it would pay 28% corporate income tax (CIT) on R1,000.
According to Treasury, by restricting the use of assessed losses against taxable income it allows them to have the fiscal space required to lower the CIT rate. The proposed amendment to section 20 comes into operation on 1 April 2022, which coincides with the date earmarked for the lowering of CIT from 28% to 27%.
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