Article by: Stamford Hill Accountant: Mlondi Shandu
Section 20 of the Income Tax Act allowed, in most circumstances, for taxpayers carrying on a trade to set off assessed losses brought forward from prior years of assessment against taxable income in the current year of assessment.
Unfortunately, the Taxation Laws Amendment Act of 2021 has restricted how these losses can now be applied.
The rationale for this amendment was to create the fiscal space to allow for a proposed reduction in the corporate tax rate from 28% to 27%.
The reduction in the corporate tax rate was seen as necessary to improve South Africa’s competitiveness, promote foreign investment and economic growth, and reduce drivers towards base erosion and profit shifting.
The proposal was enacted in terms of the Taxation Laws Amendment Act of 2021 and came into effect for years of assessment ending on or after 31 March 2023.
It only applies to companies that have incurred an assessed loss in a previous year of assessment and states that the set off of such assessed loss carried forward against current year taxable income may not exceed the higher of R1 million or 80 per cent of the current year taxable income before the application of the set-off.
The main points to note are as follows:
As before, a company may only set off an assessed loss against income derived from a trade. Therefore, if a company does not carry on a trade at all during a year of assessment, 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 circumstances, this assessed loss will therefore become lost to the company.
At SME.TAX we do more than just help our clients with tax planning, we are in fact your one stop SME shop, assisting with everything from Accounting, Business Management, BEE, Consulting, Company Registration, Payroll and Mentoring.
For more information, please visit our website www.sme.tax or give us a call on 012 021 0829