The New Assessed Loss limitation on Companies in South Africa
Under the new rules Companies will now be limited to assessed losses of R1m or 80 % of taxable income whichever is higher.
Companies with a taxable income exceeding R1 million will now pay income tax on 20% of that income. This applies even if they have a significant assessed loss balance from previous years. Remember to update your cash flow forecasts accordingly.
Important to note is that the Company Tax rate has changed from 28% to 27% as from 31 March 2023, all company year ends after this date will pay less tax. It might be 1% however every little helps.
The restriction that was placed on accumulated losses is based on restricting the set off of accumulated assessed losses to a specified percentage of taxable income.
The proposal became law in 2021 through the Taxation Laws Amendment Act. It applies to assessments that end on or after 31 March 2023.
It applies to companies that incurred an assessed loss in a previous year of assessment. The amount of loss carried forward from previous years that can be deducted from this year's taxable income is limited. It cannot exceed either R1 million or 80% of this year's taxable income before the deduction is applied.
How does this rule impact you?
- The rule first applies to years of assessment ending on or after 31 March 2023. In the case of a 12-month year of assessment, this, therefore, means that it will apply to years of assessment commencing on or after 1 April 2022.
- The rule only applies to companies. Individuals and trusts who are taxpayers are not affected. They can still utilize their previous year's losses to decrease their taxable income for the current year.
- If your taxable income is R1 million or less, you can use any assessed loss to reduce your taxable income completely. The introduction of the R1 million threshold provides relief for companies experiencing cash flow challenges.
- The rule doesn't apply to assessed capital losses, which can still be used to offset capital gains in most cases.
- The law now states that mining companies can deduct mining capital expenses (section 36) after subtracting any assessed losses. You will then carry forward the balance of unredeemed capital expenditure to the following year of assessment.
- If the current year’s taxable income calculation results in an assessed loss before taking into account an assessed loss carried forward from the previous year of assessment, then the rule does not apply. The total loss for the current year is added to the assessed loss brought forward from the previous year. The combined loss is then carried over to the next year for assessment.
- A company may only set off an assessed loss against income derived from a trade. If a company does not carry on a trade at all during a year of assessment, in terms of the decision in SA Bazaars (Pty) Ltd v CIR (1952 (4) SA 505(A), it will not be able to carry forward an assessed loss from a previous year of assessment to the next year of assessment. In these situations, the assessed loss will be lost by the company and will not be available to be utilised.
Another important change was the broadening of section 23M Income Tax Act This section deals with the deduction of interest expenses from loans between controlling relationships and related parties. Directors now need to make sure they are either declaring the interest or dividend on their loan accounts to ensure compliance with these changes.
If a company's taxable income exceeds R1 million, they will now pay corporate income tax on 20% of it. This applies even if the company has a large assessed loss balance from previous years. Adjust your cash flow forecasts accordingly.
How will this affect your tax submissions?
Some companies, for example, will not experience immediate effects.
- Companies that made a loss during the year and therefore have no taxable income to reduce.
- Companies that do not have an assessed loss balance brought forward.
- The new regulations do not impact small companies earning less than R1 million in taxable income. They are still able to deduct the entire assessed loss from their taxable income.
Important to remember is that many companies will be impacted by these changes, and we will now be entering the period where these engagements are compiled.
Frequently asked questions
What is section 23M of the income tax act?
Section 23M of the Income Tax Act limits the deduction of interest on debt between related parties especially as it relates to directors and controlling interests. This restriction applies when the recipient of the interest does not pay tax on it. Read more
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