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Proposed changes to Assessed loss provision
- 15 September 2021
- Assessed losses
- The Tax Faculty Tax Specialist
This article refers to amendments that will be effective in the 2022 year of assessment.
Introduction
The 2021 Draft Laws Amendment Bill (DLAB) was released in July 2021. The DLAB has proposed changes to section 20 of The Income Tax Act which deals with assessed losses.
Background
In determining taxable income, section 20 of the Act enables taxpayers to set off their balance of assessed losses carried forward from the preceding tax year against their income. An unutilised assessed loss balance may be carried forward to future years of assessment to be set off against future income (provided that the taxpayer’s trade continues without interruption). Accordingly, taxpayers will only be liable for income tax once they have earned a taxable profit and their assessed loss balance is depleted.
The purpose of providing for the deductibility of assessed losses for corporate taxpayers is to smooth the tax burden for companies whose primary business is cyclical in nature and not in line with a standard tax year, and for start-up companies that are not profitable in the early years of trading.
In line with the 2020 Budget announcement, government proposes to broaden the corporate income tax base by restricting the offset of the balance of assessed losses carried forward to 80 per cent of taxable income. The proposal extends to the balance of assessed losses at the time of implementation, i.e. it is not only the accumulation of losses starting from the date of implementation that will be subject to the new rules. This will contribute to providing the fiscal room for government to lower the corporate tax rate. The effect of the proposed restriction is that only companies that would be in a positive taxable income position before setting off the balance of assessed losses would be affected.
Conclusion
The proposed amendment will come into operation on 1 April 2022 and apply in respect of years of assessment commencing on or after that date.
Link to article source: http://www.treasury.gov.za/public%20comments/Tax%20Bills%202021%20Draft/2021%20Draft%20Explanatory%20Memoradum%20on%202021%20TLAB%20-%2028%20July%202021.pdf