Limitation of assessed losses – Section 20 of the Income Tax Act N0.58 of 1962 (“IT Act”)
In the 2020 Budget Review the Minister of Finance, Enoch Gondwana, announced a reduction in the corporate tax rate. The reason for the deduction as explained by the Minister of Finance was to improve the country’s competitiveness, reduce the appeal of base erosion and profit shifting, encourage investment and promote economic growth. In this regard, the international trend applied with regards to a reduced tax rate is to restrict the application of assessed losses in order to maintain a revenue neutral effect.
On the 19th of January 2022 Tax Laws Amendment Act No. 20 of 2021 was promulgated to give effect to the proposal in the budget speech relating to the limitation of assessed losses.
Section 18 of the Tax Laws Amendment Act No. 20 of 2021 states that section 20 of the IT Act, is amended to limit the balance of assessed loss carried forward 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.
Effectively for years of assessment ending on or after 31 March 2023, for companies other than a company carrying on mining operations, any balance of an assessed loss accumulated in prior years, which has been carried forward from the preceding year of assessment, can only be set off against taxable income to the extent that it will not exceed the higher of R1 million and 80 percent of the amount of taxable income.
In essence, this means that the assessed loss carried forward from the preceding year will be limited to the higher of R1 million and 80 percent of the amount of taxable income.
We have illustrated the limitation in the examples below:
Examples
Old Provision | Year 1 (‘000) | Year 2 (‘000) |
Taxable income before deducting assessed losses | 2,000 | 3,000 |
Assessed loss brought forward from preceding year | (5,500) | (3,500) |
Taxable income before deducting assessed losses | 0 | 0 |
Corporate tax at 27% | 0 | 0 |
Assessed carried forward | (3,500) | (500) |
New Provision | Year 1 (‘000) | Year 2 (‘000) |
Taxable income before deducting assessed losses | 2,000 | 3,000 |
Assessed loss brought forward from preceding year | 5,500 | 3,900 |
Assessed loss deduction limited to higher of R1million and 80% of taxable income | (1,600) | (2,400) |
Taxable income before deducting assessed losses | 400 | 600 |
Corporate tax at 27% | 108 | 162 |
Assessed carried forward | 3,900 | 1,500 |
The Old Provision, allowed for the full assessed loss to be brought forward from the preceding years and utilised against taxable income without any limitation.
The New Provision, however, limits the utilisation of the assessed loss against taxable income to the higher of R1 million and 80% of current taxable income.
This restriction will however only apply to companies who have a taxable income at year end with a prior year assessed loss balance that has been carried forward.
Any balance of the assessed loss after set-off is applied will be carried forward to the following year of assessment. The effect of the new rules is that the utilisation of the assessed loss will be deferred and utilised over a longer period.
Authors:
Sonica Schoeman, IFRS Director
Althea Soobyah, Tax Consulting Director
05 July 2023
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