This year’s budget speech proposed two significant changes to corporate taxation. In an effort to incentivise corporate investment, the finance minister proposed reducing the corporate income tax rate from 28% to 27%. To make up for the resultant shortfall in tax revenue, he also tabled restrictions on assessed losses. Read on to find out how the changes could affect you.
First, the good news!
The minister of Finance proposed a reduction in corporate Income Tax rate from 28% to 27% during his February 2022 budget speech. If enacted, this very welcome change would be applicable to companies with year of assessment ending on or after 31 March 2023.
But as the US politician John Coleman famously said, “What the government gives it must first take away.” To offset the estimated R2.6 billion annual loss in government revenue that will result from changing the corporate tax rate, the minister also proposed limitations on the use of assessed losses.
Assessed Losses 101
The utilisation of assessed losses by companies is regulated by section 20 of the Income Tax Act 58 of 1962. The section clearly states that companies may carry forward unutilised assessed losses to future years of assessment. These can be set off against future income, provided the company continues to trade. Under the current law, a company only becomes liable for tax once they have exhausted the balance of assessed losses.
What’s changed under the new proposals?
If the finance minister’s proposals are implemented, companies will only be permitted to set off the assessed loss carried forward from the preceding year of assessment to the extent that it does not exceed the higher between:
- 80% of taxable income determined in current year of assessment and
- R1 million.
Depending on the entity’s taxable income in current year of assessment, most companies with an assessed loss of more than R1 million will be liable to corporate tax on 20% of their income. The most important fact is that the balance of assessed loss brought forward should not exceed the higher between 80% of current taxable income and 1 million.
The de minimis threshold
Companies with an assessed loss brought forward from the preceding year of assessment that doesn’t exceed R1 million will be permitted to fully utilise the assessed loss as per the de minimis (“of little consequence”) threshold proposed by the government. The aim for the de minimis threshold is to accommodate small companies, newly established firms and entities facing cashflow challenges.
What it all means
The proposed changes would have a positive impact on government revenue while also enabling the lowering of the corporate tax rate. Companies sitting on a positive taxable income position prior to setting off the assessed loss carried forward will be affected.
When will the changes take effect?
The draft legislation has just been released for public comment. Assuming the changes to the Income Tax Act are gazetted, they will become effective from 1 April 2022 and will be applicable to years of assessment commencing on or after this date. The limitation will be applicable to assessed losses generated prior to and after 1 April 2022. Companies with a year end of 31 March 2023 will potentially be the first to be affected by this proposed amendment.
The bottom line Sentinel Advisory has a team of Tax Professionals who are always available to assist or advise companies who are impacted by the changes in the assessed loss rules and the reduction in the corporate tax rate.