Changes to on the cards to tax laws – Assessed Loss
In terms of current law, taxpayers may set-off the balance of their assessed loss carried forward from a prior tax year (PY) against income of the current year (CY). Provided a taxpayer carries on trading operations, it is entitled to carry forward its unutilized assessed loss balance to future years of assessment to set off against future income with the effect that the taxpayer will only become liable for income tax once their assessed loss is depleted and they realise taxable income. Most small businesses have substantial assessed losses that have built up from prior trading and even more after the disastrous COVID trading year(s).
The Draft Taxation Laws Amendment Bill, 2021 (“the Draft Bill”) proposes to restrict the ability of a company to set off its assessed loss carried forward from prior year against its income in the current year.
It is proposed for this amendment to come into operation on 1 April 2022 and to apply in respect of years of assessment commencing on or after such date. Should the proposal be enacted, it would mean that a company would only be allowed to utilize a portion of the assessed loss against 80% of its current year’s taxable income. The balance can then be carried forward to the next period.
Current tax law (no restriction for assessed loss)
| Company ABC assessed loss b/f | R 150 000 |
| Company ABC CY profit | R 100 000 |
| Tax effect: | |
| Profit less Assessed loss | |
| Tax payable | NIL |
| Assessed Loss c/f | R 50 000 |
Proposed amendment (RESTRICTION in assessed loss)
| Company ABC assessed loss b/f | R 150 000 |
| Company ABC CY profit | R 100 000 |
| Tax effect: | |
| Profit less Assessed loss limit | R100 000 @ 80% |
| 80% of profit can be utilized in offset | |
| Tax payable | 28% of R20 000 = R5 600 |
| Assessed Loss c/f | R150 000 – R80 000 = R70 000 |
This change in legislation will bring SA in line with global tax practice, but the question is will this be the correct time to implement these changes? So please do not be surprised when your accountant tells you have a tax bill come 2023.
