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."

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.

Contact us today to discuss how we can help you!

Related Articles

Your Tax Deadlines for April 2024

05 April – Monthly Pay-As-You-Earn (PAYE) submissions and payments 25 April – VAT manual submissions and payments 29 April – Excise Duty payments 30 April – Value-Added Tax (VAT) electronic

Read More »

Your Tax Deadlines for March 2024

07 March – Monthly Pay-As-You-Earn (PAYE) submissions and payments 25 March – VAT manual submissions and payments 27 March – Excise duty payments 28 March – End of the 2023/24

Read More »

Get Access to your PDF Document

Elevate your business insights : Budget Speech 2024!

Access a summary of the Budget Speech 2024.Gain a competitive edge by understanding the key points crucial to your business success.