BINDING GENERAL RULING (INCOME TAX) 73
DATE : 30 July 2024
ACT : INCOME TAX ACT 58 OF 1962
SECTION : SECTION 20(1)(a)(i)
SUBJECT : MEANING OF TAXABLE INCOME FOR PURPOSES OF SETTING-OFF THE BALANCE OF AN ASSESSED LOSS BY A COMPANY
Preamble
For the purposes of this ruling –
• “assessed loss” means the term as defined in section 20(2), and refers to the tax loss that arises in the current year of assessment after deducting the admissible deductions in section 11 from the income against which they are admissible;
• “balance of assessed loss” means the assessed loss that is brought forward from the preceding year of assessment;1
• “BGR” means a binding general ruling issued under section 89 of the Tax Administration Act 28 of 2011;
• “company” means a “company” as defined in section 1(1) and envisaged in section 20(1)(a)(i);
• “the Act” means the Income Tax Act 58 of 1962;
• “the Eighth Schedule” means the Eighth Schedule to the Act; and
• any other word or expression bears the meaning ascribed to it in the Act.
1. Purpose
This BGR provides guidance on how companies can use their assessed losses to lower their tax liability. The guidance is based on changes made by the Taxation Laws Amendment Act 20 of 2021. Companies can benefit from these changes by utilizing their assessed losses effectively. By following the guidelines outlined in this BGR, companies can potentially reduce the amount of taxes they owe.
2. Background
A taxpayer has an assessed loss when their deductions are greater than their income for that tax year.
The sentence is too technical. Here is a simplified version: You can learn how to calculate a balance of assessed loss in the court case CIR v Louis Zinn Organization (Pty) Ltd 1958. This case is often referred to as 4 SA 477 (A) or 22 SATC 85 at 95.
The term “taxpayer” as defined in section 1(1) means any person chargeable with any tax under the Act.
The phrase "year of assessment" is outlined in section 1(1) and "refers to any year or other duration during which any tax or duty can be levied under this Act, and any mention in this Act of any year of assessment ending on the last or the twenty-eighth or the twenty-ninth day of February will, unless the context suggests otherwise, in the instance of a corporation or a portfolio of a collective.
Section 20(1)(a) says that a company can use past losses to lower its taxable income for the current year. If a company had losses in previous years, it can apply those losses now. This helps reduce the amount of income that is taxed this year. This means that if a company had losses before, it can apply those losses to lower its taxable income this year.
Any unutilised portion of the assessed loss may be carried forward to a subsequent year of assessment.
Starting from March 31, 2023, and relevant for tax years ending on or after this date, the offset of the remaining assessed losses for corporations carried over from the previous tax year is restricted to an amount that is not more than the greater of R1 million and 80% of the taxable income calculated prior to the implementation of section 20.4.
The aforementioned restriction on offsetting a company's assessed loss balance is not uniformly enforced, particularly in terms of how taxable capital gains are handled. Some only apply the restriction to taxable trade income, thereby excluding taxable capital gains from the taxable income.
However, another viewpoint applies the restriction to "taxable income" as outlined in section 1(1), which incorporates taxable capital gains into the taxable income.
3. Application of the law
The determination of “taxable income” is central to the calculation of a taxpayer’s liability for normal tax. Section 1(1) defines “taxable income” as meaning the aggregate of –
(a) the amount remaining after deducting from the income of any person all the amounts allowed under Part I of Chapter II to be deducted from or set off against such income;
(b) and all amounts to be included or deemed to be included in the taxable income of any person in terms of this Act;”.
The phrase "all amounts to be included" in paragraph (b) of the aforementioned definition encompasses section 26A. This section specifies that a person's taxable capital gain, as calculated in the Eighth Schedule, should be incorporated into that person's taxable income for the corresponding year of assessment.
The introductory words to section 20(1) refer to “taxable income derived by any person from carrying on any trade”. This implies that a company can set off the balance of assessed loss only if it conducted a trade, that is, it had to have income from trade and not only so-called passive income or income of a capital nature.5 The reference to “carrying on any trade” therefore does not limit the taxable income to only that from trade.
The 80% limitation in section 20(1)(a)(i) refers to the company’s taxable income without limiting it to so-called trading income. Therefore, “taxable income” as defined in section 1(1), which includes taxable capital gains, must be used when applying the 80% limitation.
4. Ruling
Having regard to the wording of section 20(1)(a)(i) and particularly the phrase “80 per cent of the amount of taxable income”, the calculation of the 80% limitation amount should be based on “taxable income” as defined in section 1(1), which includes taxable capital gains. This ruling constitutes a BGR issued under section 89 of the Tax Administration Act 28 of 2011.
5. Period for which this ruling is valid
This BGR applies from date of issue until it is withdrawn, amended or the relevant legislation is amended.
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