In 2020, as part of National Treasurys endeavour to broaden the tax base, it was proposed that a restriction be imposed in respect of the extent to which an assessed loss carried forward by a company may be set-off against the taxable income of that company in the current year of assessment (YOA). Specifically, it was proposed that the offset of the carried forward assessed loss be restricted to 80% of the taxable income of the company for that YOA, with the effect that the company would be liable to pay tax on at least 20% of its taxable income, regardless of whether the assessed loss carried forward exceeds the taxable income. This proposal was intended to come into effect on 1 January 2021.
On a similar note, in the 2021 Budget, it was reiterated that the ability to utilise assessed loss offsets would be reduced in order to facilitate the lowering of the corporate income tax rate over the medium term. It was also reaffirmed that broadening the tax base by limiting the use of assessed losses would assist the government in restructuring the corporate income tax system in a revenue-neutral manner.
However, much to the relief of corporate South Africa, it would appear that the need to assist financially distressed businesses that are suffering from the devastating effects of the COVID-19 pandemic related restrictions on economic activities has not been lost on Government.
To this end, it has been indicated that the effective date of the amendments, in respect of which the use of carried forward assessed losses will be limited, will be postponed until 2022. This postponement will no doubt be well received by many companies who have suffered significant losses as a result of the restrictions on economic activities pursuant to the national lockdown. These losses may thus be fully utilised by companies as a set off against their taxable income up until 2022 (provided the requirements of, amongst others, section 20 of the Income Tax Act are met). This postponement, coupled with the lowering of the corporate income tax rate to 27% with effect from years of assessment commencing on or after 1 April 2022 provides welcome relief.