Reduced Corporate Tax Rate

While the reduction in our corporate income tax rates is welcomed, it could be neutralised by the loss limitation rule.

It certainly seemed like a win for taxpayers when Finance Minister Enoch Godongwana announced in the National Budget Speech, that the corporate tax rate will be reduced from 28% to 27% with effect from years of assessment commencing on or after 1 April 2022.

There is, however, a sting in the tail….

For years of assessment ending on or after 31 March 2023, there will be a limit on a company’s brought forward assessed loss that will be available for set off against taxable income. The assessed loss available for set off against taxable income will then be limited to the higher of either 80% of the taxable income for that year before considering the assessed loss brought forward, or R 1 million.

Up until now, companies could previously offset the full balance of any assessed loss carried forward from a previous tax year against all its taxable income for the current year. In addition, companies could carry over any assessed loss balance remaining to future years indefinitely subject only to the requirement that the company continues to carry on a trade. In effect, it meant that a company would only become liable for income tax once it earned a taxable profit, and the balance of the assessed loss was exhausted.

This means that income tax will now always be levied on 20% of the taxable income for the year where the taxable income in the current year exceeds the R1 million threshold, no matter what the assessed loss balance carried forward from previous years may be.

Taxpayers need to carefully consider the impact of this new assessed loss limitation rule not only when submitting their future tax returns, but also in estimating their provisional tax liabilities.

Some companies will not be affected immediately, for example, companies with no assessed loss balance, or those with a taxable loss.

This effectively means that Treasury will be collecting revenue irrespective of a company being in an assessed loss position.

If you are new to the concept of usufruct, we are here to guide you. Contact us today
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