During the 2022 Budget Speech, the Minister of Finance announced that the corporate tax rate will be reduced from 28% to 27% with effect for years of assessment ending on or after 31 March 2023.
While the reduction in the corporate tax rate is welcomed and may, to some extent, bring South Africa in line with the international standard, it did not come without a cost.
For years of assessment ending on or after 31 March 2023, a limitation is placed on the assessed loss brought forward by a company 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:
For example, Company A has taxable income of R600 before off setting accumulated assessed losses of R1 000. The accumulated assessed loss exceeds 80% of the taxable income. As a result, Company A may only utilise R480 (80%) of the accumulated assessed loss and will pay tax at 27% on the taxable income of R120. The balance of the assessed loss will be carried forward to the next year of assessment.
This means that the National Treasury will be able to collect revenue regardless of whether it is in a net assessed loss position.
However, the small, micro and medium enterprises (SMMEs) market is somewhat protected in that assessed losses below R1 million will not be affected by the set-off limitation.
Taxpayers must carefully consider the impact of this new assessed loss limitation rule on the impact of their company’s cash flow, but also in estimating their provisional tax liabilities, to avoid unnecessary penalties and interest.