How the New Assessed Loss Tax Limitation Works

Previously, company losses could (subject to certain requirements) be offset against 100% of taxable income in the following year, with any balance rolling over to subsequent years. Under the new rules, an assessed loss can now only be set off against 80% of taxable income or R1 million – whichever is higher – in the relevant tax year, with the remaining balance still rolling over.

Some companies, like those with taxable incomes under R1 million, are unaffected, but for others, it means that even if their assessed loss balance far exceeds their taxable income, they will from now pay tax on up to 20% of taxable income. There are other complexities involved, including wording still to be clarified, so read on for more detail…

"People who complain about taxes can be divided into two classes: men and women."

Unknown

The assessed loss rules have always allowed companies to deduct from their taxable income each year any assessed losses from previous years. The remaining assessed loss balances could be carried forward indefinitely. This meant that a company would only pay income tax once it made a taxable profit and all previous assessed losses had been deducted from the taxable income.

These rules have changed and may affect your next income tax bill.

What’s new?

Under the new rules, assessed losses brought forward from a previous year of assessment can only be offset against a maximum of 80% of the current year’s taxable income or R1 million, whichever is higher.

This means that many companies will now pay income tax on up to 20% of the taxable income for the year if it exceeds R1 million, even if the assessed loss balance carried forward from previous years far exceeds the taxable income. Adjust your cash flow forecasts accordingly.

What you should know

The new rules apply to any year of assessment that began on 1 April 2022 onwards and that ends on or after 31 March 2023.

The new limitation applies to a company’s assessed loss balance as at 1 April 2022, and not only to assessed losses accumulated after this date.

Companies do not lose the balance of an assessed loss that could not be utilised in one tax year, it is just carried forward to the next tax year.

If a company does not trade for a full year of assessment and no income is earned from such trade, the assessed loss balance will be lost.

Further complex rules may apply in certain circumstances, for example, the 3-out-of-5-years rule and the ring-fencing of losses if a business carries on one of the listed “suspect trades”, which means professional advice is essential when deducting an assessed loss against taxable income.

Will your tax bill be affected?

Some companies will not be affected immediately, for example:

Companies that made a loss during the year and therefore have no taxable income to reduce;
Companies that do not have an assessed loss balance brought forward; and
Smaller companies with a taxable income below R1 million are not affected by the new rules and can still deduct the full balance of an assessed loss against 100% of their taxable income.

However, the changes will have tax cash flow implications for other companies. The examples below illustrate this.

Example 1	New rules	Previous rules
Taxable income	R1,500,000	R1,500,000
Assessed loss balance brought forward	R3,000,000	R3,000,000
Assessed loss allowed	Greater of 80% of taxable income / R1 million	100% of taxable income
Assessed loss deducted	R1,200,000 (80% of R1,500,000)	R1,500,000
Taxable income after deduction	R300,000 (R1,500,000 less R1,200,000 deducted above)	R0
Tax payable at 27%	R81,000	R0
Assessed loss balance carried forward	R1,800,000 (R3,000,000 less R1,200,000 deducted above)	R1,500,000 (R3,000,000 less R1,500,000 deducted above)

Example 2	New rules	Previous rules
Taxable income	R4,000,000	R4,000,000
Assessed loss balance brought forward	R3,500,000	R3,500,000
Assessed loss allowed	Greater of 80% of taxable income / R1 million	100%
Assessed loss deducted	R3,200,000 (80% of R4,000,000)	R3,500,000
Taxable income after deduction	R800,000 (R4,000,000 less R3,200,000 deducted above)	R500,000
Tax payable at 27%	R216,000	R135,000
Assessed loss balance carried forward	R300,000 (R3,500,000 less R3,200,000 deducted above)	R0

Example 3	New rules	Previous rules
Taxable income	R30,000,000	R30,000,000
Assessed loss balance brought forward	R31,000,000	R31,000,000
Assessed loss allowed	Greater of 80% of taxable income / R1 million	100%
Assessed loss deducted	R24,000,000 (80% of R30,000,000)	R30,000,000
Taxable income after deduction	R6,000,000 (R30,000,000 less R24,000,000 deducted above)	R0
Tax payable at 27%	R1,620,000	R0
Assessed loss balance carried forward	R7,000,000 (R31,000,000 less R24,000,000 deducted above)	R1,000,000

Both the old and the new rules are complex. In addition, some of the wording in the legislation still needs to be clarified, so speak to your accountant about the impact the new rules will have on your next tax bill.

© DotNews. The information herein should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your prefessional advisor for specific and detailed advice.