Assessed losses: Relaxation of proposed limitation rules
In prior articles, we questioned whether proposals to limit the ability of companies to fully set-off their assessed losses should be implemented in the current economic climate where business are attempting to recover from the effects of COVID-19. National Treasury has, fortunately, addressed concerns in this regard.
To recap, in terms of current law, taxpayers may set-off the balance of their assessed loss carried forward from a prior tax year (“Year 1”) against income of the current year (“Year 2”). Provided a taxpayer carries on trading operations, it is entitled to carry forward its unutilised assessed loss balance to future years of assessment to set off against future income with the effect that the taxpayer will only become liable for income tax once their assessed loss is depleted, and they realise taxable income.
The Draft Taxation Laws Amendment Bill, 2021 released on 28 July 2021 (“the Draft Bill”) proposed to restrict the ability of a company to set off its assessed loss carried forward from Year 1 against its income in Year 2 with effect from 1 April 2022. In terms of the proposal contained in the Draft Bill, a company would only be able to set-off the balance of its assessed loss carried forward against 80% of its taxable income - without any carve-outs or exclusions to this rule (“the Original Proposal”).