The burden of assessed losses

6 January 2025

Section 20 of the Income Tax Act No. 58 (1962) (“IT Act”) provides for the utilisation of prior year assessed losses against taxable income derived by a company. Certain legislative limitations impact the quantum of the assessed loss that may be utilised by companies.

Background

Historically, section 20 of the IT Act allowed companies to utilise 100% of their assessed losses carried forward from previous years against taxable income.

Effective for years of assessment ending on or after 31 March 2023, section 20 was amended to include a limitation on the utilisation of assessed losses carried forward from previous years. Alongside this amendment, the corporate tax rate was reduced from 28% to 27%.

According to the Minister of Finance, Enoch Godongwana, the aim of these amendments are to enhance the country's competitiveness, reduce base erosion and profit-shifting, attract investment, and foster economic growth.

The current state of affairs

Currently, section 20(1)(a) of the IT Act limits the utilisation of assessed losses for companies to the higher of R1 million or 80% of taxable income. In other words, companies must pay tax on at least 20% of their taxable income or on R1 million, whichever amount is greater.

This means that companies that previously had significant assessed losses and was not in a tax-paying position, now have to pay a minimum amount of tax. This will have a direct impact on the company's cash flow position.

Proposed amendments

The 2024 Taxation Laws Amendment Bill (“the TLAB”) proposes that where steps are taken to liquidate, wound up or deregister a company, the assessed loss limitation should not apply to such company. In other words, such company will be allowed to set off 100% of any assessed loss brought forward from a previous year against taxable income. The amendment will apply to years of assessment ending on / after 31 December 2024.

Takeaway

Understanding and adapting to the provisions pertaining to the utilisation of assessed losses, are crucial. These changes not only affect tax liabilities but also require strategic financial and tax planning.

Companies need to ensure that their first and second provisional tax calculations are correct, and that the assessed loss limitation has been accounted for.

Companies should also consider revising their tax planning strategies to account for these limitations, in order to better manage cash flow pressures

Authors:

Elmien Theron, Senior Manager

Priscilla Letsoalo, Assistant Manager