Section 20: Assessed Losses 2022

As has been the topic of discussion for the better part of two years, National Treasury announced its intention to reduce the corporate tax rate from 28% to 27%. To offset this change, they further proposed a limitation of the use of assessed losses and the deductibility of interest.

The effective date of the assessed loss amendment and the corporate tax rate change have been linked and is applicable for years of assessment commencing on or after 1 April 2022.

This amendment only impacts companies. The amendment will therefore not affect individuals and trusts.

In its earliest iteration, the proposal was that the balance of assessed losses brought forward would be limited to 80% of taxable income. Accordingly, 20% of any SA company’s taxable income would be unshielded by an available assessed loss and fully taxable at the corporate tax rate.

In its refined form, the provision reads as follows –

For the purpose of determining the taxable income derived by a company, there shall be set-off against the income so derived, any balance of assessed loss brought forward to the extent that the amount set-off does not exceed the higher of:

• R1 million; and
• 80% of the amount of taxable income (as determined before taking into account the application of this provision) (“the 80% rule”).

By way of example(s):

Example 1:

Company X derives taxable income of R900 000 in FY 2023. Company X has an assessed loss of R600 000 brought forward from the FY 2022.

• Step 1: Apply the 80% rule
  • 80% x R900 000 = R720 000.
• Step 2: Utilise the higher of the two amounts (i.e. R720 000 vs R1 million) in Step 3
• Step 3: Determine whether the prior year assessed loss exceeds R1 million.
  • In this case it does not. The full assessed loss (i.e. R600 000) may be deducted.
• Step 4: Company X will be subject to tax on R300 000 (R900 000 less R600 000).

Example 2:

Company X derives taxable income of R2 million in FY 2023. Company X has an assessed loss of R3 million brought forward from the FY 2022.

• Step 1: Apply the 80% rule
  • 80% x R2 million = R1.6 million
• Step 2: Utilise the higher of the two amounts (i.e. R1.6 million vs R1 million) in Step 3
• Step 3: Determine whether the prior year assessed loss exceeds R1.6 million.
  • The prior year assessed loss (i.e. R3 million) exceeds R1.6 million. Accordingly, only R1.6 million of the R3 million assessed loss may be deducted.
• Step 4: Company X will be subject to tax on R400 000 (R2 million less R1.6 million).
• The remainder of the assessed loss, i.e. R1.4 million (R3 million less R1.6 million) will be carried forward to the succeeding FY.

Example 3:

Company X derives taxable income of R1.2 million in FY 2023. Company X has an assessed loss of R2 million brought forward from the FY 2022.

• Step 1: Apply the 80% rule
  • 80% x R1.2 million = R960 000
• Step 2: Utilise the higher of the two amounts (i.e. R960 000 vs R1 million) in Step 3
• Step 3: Determine whether the prior year assessed loss exceeds R1 million.
  • The prior year assessed loss (i.e. R2 million) exceeds R1 million. Accordingly, only R1 million of the R2 million assessed loss may be deducted.
• Step 4: Company X will be subject to tax on R200 000 (R1.2 million less R1 million). The remainder of the assessed loss, i.e. R1 million (R2 million less R1 million) will be carried forward to the succeeding FY.

06/10/2022