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Where a company in the ordinary course of business finds itself in a position that its taxable income is exceeded by income tax deductions, a tax loss arises. Once assessed by the South African Revenue Service (“SARS”), the loss becomes classified as an assessed loss, which could historically be offset against taxable profit in ensuing years.

In the 2020 Budget speech, Finance Minister Tito Mboweni announced Government’s plans to restructure the income tax system through broadening the income tax base with a reduction in the corporate income tax rate. For years of assessment occurring in 2020/2021, the income tax rate shall remain at 28%, but with effect from years of assessment commencing on or after 1 January 2021, the offset of assessed losses carried forward will be capped at 80% of taxable income in the year of assessment. For companies that are in assessed loss positions, this means that they will start paying tax even though they are trading in an ongoing loss state.

The specifics of Government’s plan will be announced in due course, including whether or not the excess of assessed loss (not permitted for deduction) may be carried forward to future tax years. What is clear, however, is that companies that are considering capital expenditures and that are accustomed to the assessed losses arising from Wear and Tear allowances or accelerated deductions for capital projects, will need to be mindful of the implications of this amendment on their cash flow.

2021 Changes that will affect you
To illustrate the implication of this proposal, see the example below:
Current Proposed
Year 1 Year 2 Year 2
Current year taxable income/(loss) (50 000) 35 000 35 000
Application of assessed loss 0 (35 000) (28 000)
20% of taxable income subject to tax 0 0 7 000
Assessed loss brought forward 0 (50 000) (50 000)
Assessed loss carried forward (50 000) (15 000) (22 000)
Tax @ 28% 0 0 1 960

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