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income tax
Company assessed losses are regulated by Section 20 of the Income Tax Act and state that a company can carry forward assessed losses should the entity continue to trade. If the assessed losses brought forward exceed the taxable income of that financial year, the taxable income could be set off against said losses.

The Draft Taxation Laws Amendment Bill 2021, released in July 2021, includes proposed changes to company rules on the use of assessed losses. As part of its efforts to increase the corporate income tax base, the bill proposes modifications to Section 20 of the Income Tax Act.

What do these changes entail?

In terms of these modifications, businesses may only set off the balance of an assessed loss carried forward to the extent that doing so does not exceed 80% of taxable income for that year. This plan would also impose a tax on at least 20% of taxable income for any year, regardless of actual losses brought forward.

Any unassessed loss that hasn’t been carried forward will be available to be carried forward, subject to the 80% limit in future years. Any current-year loss could be added to the assessed loss balance. However, once your business has exceeded the taxable income in any year, you will be required to pay tax on 20% of that income, with only 80% of the taxable amount able to be set off against any available assessed loss.

This amendment is reasonable as it affects businesses equally, rather than limiting the number of years that assessed losses can be carried forward, which could negatively impact businesses with large investments or lengthy lead times to profitability.

The proposed date to put this amendment in effect is 1 April 2022, with the changes being applicable to assessments beginning on or after that date. The restriction would include assessed losses incurred before and after 1 April 2022.

Here’s how you can maintain your assessed losses

Should your company be liable to assessed losses, ensure that these losses are crystalised through SARS income tax assessments. Determining how this loss-restriction will affect your business’s future tax position can be done by consulting with the experienced tax experts at MMS Group.

If commercially feasible, it may also be advisable to reconsider the timing of entering new project agreements, as the goal will be to utilise losses as quickly as possible. Each year that passes lessens the overall value of your assessed loss due to the time value of money.

If you require assistance in assessing your business’s assessed losses in preparation for the Income Tax Act modifications, the specialists at MMS Group can assist. For more information, contact our team.

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