During the 2020 budget speech the Minister of Finance proposed to limit the assessed losses a company may set off against its income to 80% of its taxable income for the year. However, the proposal was put on ice and it was unclear whether it would ever be implemented.
The uncertainty has been resolved as on 28 July 2021 National Treasury issued the Draft Taxation Laws Amendment Bill, 2021, which includes an amendment to section 20 of the Income Tax Act that would restrict the assessed loss a company may set off against its taxable income to 80% of its taxable income for the year of assessment. Any amount which is not set off may then be carried forward to the following year of assessment.
According to the Explanatory Memorandum released with the Taxation Laws Amendment Bill the reason behind the proposal is to provide for the fiscal space required to enable National Treasury to lower the corporate income tax rate in a revenue neutral manner. Further reasons provided include that:
- corporate income tax is the most volatile of the main tax revenue instruments and this proposal will assist in smoothing corporate income tax revenues;
- allowing full loss offsets against taxable income allows for less distortions towards less risky projects and enhances the stabilisation effects of corporate income taxation; and
- although partial loss offsets may have a negative impact on business’ cash flow and investment, they can help in curtailing tax avoidance.
The nub of the proposal is that companies that are in a positive taxable income position before setting off the balance of assessed losses carried forward would only be allowed to set off assessed losses equal to 80% of their taxable income and would at a minimum have to pay corporate income tax on 20% of their taxable income. It is important to note that this proposal will only apply to companies.
Section 20 of the Income Tax Act, subsequent to the proposed amendment, will read as follows:
“For the purpose of determining the taxable income derived by any person from carrying on any trade, there shall, subject to section 20A, be set off against the income so derived by such person
(a)(i) that is a company, any balance of assessed loss incurred by that person in any previous year which has been carried forward from the preceding year of assessment, to the extent that the amount of such set-off does not exceed 80 per cent of the amount of taxable income determined before taking into account the application of this provision”…
The proposed amendment to section 20 is to come into operation on 1 April 2022 and will apply to years of assessment commencing on or after that date.
The Amendment Bill is currently open to public comments, which comments need to be submitted before 28 August 2021.
This bulletin was prepared by partner Conor McFadden, associate Johan Coertze and candidate attorney Robin Monteiro.