CUTTING YOUR TAX LOSSES

For years of assessment ending on / after 31 March 2023, a limit will be imposed on the balance of assessed loss of corporate taxpayers.

THE BASICS

An assessed loss is the amount by which allowable income tax deductions exceed the income of a company. In simple terms, it is a tax loss.

A company is entitled to carry forward a tax loss, if the company carries on a trade during the subsequent year of assessment. A tax loss brought forward from a previous year of assessment, is also referred to as a balance of assessed loss.

A balance of assessed loss can be set-off against the income derived from the trade of a company.

Example 1

Assume that Company Z incurs a tax loss of R3.5 million in Year 1, and derives taxable income of R3 million in Year 2. The tax loss of R3.5 million incurred in Year 1 can be carried forward to Year 2. In Year 2, the tax loss of R3.5 million is then referred to as a balance of assessed loss.

THE LIMIT

For companies with a financial year ending on / before 28 February 2023, the full balance of assessed loss can still be set off against any taxable income derived by the company. The new limitation threshold will only apply to the financial year ending 29 February 2024.

Example 2

Using the same information as stated under Example 1, now assume that Company Z has a financial year ending 31 December 2022. Company Z will be entitled to set off the full balance of assessed loss of R3.5 million against its taxable income of R3 million in Year 2. This means that Company Z has a tax loss of R500 000 in Year 2, which can be carried forward to Year 3.

For companies with a financial year ending on / after 31 March 2023, the balance of assessed loss that can be set off against taxable income is limited to the higher of R1 million or 80% of taxable income.

Example 3

Using the same information as stated under Example 1, if it is assumed that Company Z has a financial year ending 30 June 2023, the balance of assessed loss that can be set off against the taxable income of R3 million in Year 2, will be limited to R2.4 million (R3 million x 80%). This means that the taxable income of Company Z for Year 2 will be R600 000. Company Z will be liable to pay normal income tax of R162 000 (R600 000 x 27%). Company Z will be entitled to carry forward the remaining balance of assessed loss of R1.1 million (R3.5 million – R2.4 million) to Year 3.

THE TAKE AWAY

Even if a company has a significant balance of assessed loss, it may still be required to pay normal income tax due to the limitation of the balance of assessed loss. Therefore, it is important that this limitation is also accounted for in determining the:

• Estimated taxable income for purposes of quantifying provisional tax payments; and
• Value of the deferred tax asset for financial accounting purposes.

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