In the 2020 Budget Review, the Minister of Finance announced government’s intention to restructure the corporate income tax system by broadening the base (that is, limiting deductions and/or allowances) and lowering the corporate income tax rate.
In his budget speech delivered on 24 February 2021, the Minister of Finance announced that the corporate income tax rate will be reduced to 27% for companies with assessment years beginning on or after 1 April 2022. This means that for tax years ending on or after 31 March 2023, the corporate income tax rate is 27%. This rate cut is accompanied by an expansion of the corporate income tax base, including the limitation of assessed losses for companies and close corporations. There is a global trend to limit the use of assessed losses and lower the corporate income tax rate. Thus, South Africa is aligning with international developments.
National Treasury cited four main reasons for the limitation of assessed losses for companies and close corporations:
- It broadens the base and lowers the headline corporate income tax (CIT) rate in a revenue-neutral corporate income tax package.
- Allowing full loss offsets against taxable income reduces distortions towards less risky projects and enhances the stabilisation effects of corporate income taxation, but many countries do not achieve perfect symmetry in their CIT regimes and have used this measure to fund lower CIT rates.
- It will smooth CIT revenues, the most volatile tax revenue instrument.
- Partial loss offsets reduce tax avoidance.
Section 20 of the Income Tax Act covers assessed losses and now contains a limitation rule of assessed losses brought forward, for companies and close corporations.
Assessed loss carried forward from the previous year: R6 000 000
Taxable income in the current year: R5 000 000
Assessed loss limited to the greater of R1 000 000, or R5 000 000 x 80% = R4 000 000
The company will be able to utilise R4 000 000 of the assessed loss against taxable income. The remaining assessed loss of R2 000 000 will be carried forward to the next year. Thus, the company will be taxed on R1 000 000 in the current year.
Scope, implication and effect
- Scope − In determining the ‘taxable income’ from ‘trade’ the taxpayer can set off against ‘income’ any balance of assessed loss brought forward from the previous year limited to the greater of R1 million, or 80% of the current year’s taxable income (ignore the current year’s assessed loss and/or assessed losses brought forward from the previous year).
- Implication − Assessed losses carried forward by companies and close corporations are subject to a limitation rule.
- Effect − The effect of the limitation is that only companies that would be in a positive taxable income position before setting off the balance of assessed losses would be affected. The Finance Minister mentioned in his budget speech that the reason for reducing the corporate income tax rate is to make our tax system more attractive. However, it is interesting to note that since the announcement, both the UK and the USA announced that they would be increasing company tax rates.
Muneer Hassan CA(SA)
Tax Consultant, Senior Lecturer in Taxation at UJ and Lecturer on the Gauteng Board Course