Corporate tax – Restricting the set-off of assessed losses

Effective 31 March 2023 the offset of the balance of assessed losses carried forward will be restricted to 80% of taxable income. This restriction provided the fiscal space required to reduce the corporate tax rate, to 27%.

The limitation of assessed losses is not unique to South Africa and there has been an international trend to restrict the use of assessed losses. The 2020 Budget review cited four reasons for this change:

• To form part of a corporate income tax package to broaden the base and reduce corporate income tax rate in an overall revenue neutral manner.
• Allowing full loss offsets against taxable income allows for less distortions towards less risky projects and enhances the stabilisation of corporate income taxation.
• Corporate income tax is the most volatile of the main tax revenue instruments and this measure will assist in smoothing revenues. This proposed measure will only apply once businesses turn profitable.
• Partial loss offsets may have a negative impact on business cash flow but can help in curtailing tax avoidance and overstatement of losses.

The limitation of the assessed loss can only apply when you have a taxable profit of R1 million in the current year of assessment.

The effect is that income tax will always be levied on 20% of the taxable income for the year where the taxable income in the current year exceeds the R1 million threshold, no matter what the assessed loss balance carried forward from previous years may be.

Table based on an example from Draft Explanatory Memorandum On The Taxation Laws Amendment Bill, 2021 (illustrative figures in millions of Rand)

Tracey Jones
Tax Compliance Specialist
General Tax Practitioner (SA)