Impact of covid-19 on proposals to limit the use of assessed losses

In terms of current law, where the permissible tax deductions of a company exceed the company’s income during a year of assessment, an assessed loss may arise. The company is, in certain instances, permitted to carry forward such assessed loss to the next year of assessment for purposes of offsetting the same against taxable income in the succeeding year of assessment.

The 2020 Budget Review announced that government intends to restructure the corporate income tax system over the medium term by reducing the corporate income tax rate while broadening the corporate income tax base (please click the below link to refer to our prior article).

One of the proposals made in the 2020 Budget Review to broaden the corporate income tax base was that a restriction be enacted in terms of which the set-off of assessed losses carried forward be limited to 80% of an entity’s taxable income. It was proposed that this would enter into force with effect from 1 January 2021 for years of assessment commencing on or after such date.

On 21 April 2020, the President announced additional measures aimed at providing approximately R70 billion support to individuals and businesses due to the economic impact of COVID-19.

In a Media Statement released by National Treasury on 23 April 2020, it was indicated that some of the measures directed at increasing the corporate tax base as proposed in the 2020 Budget Review will be delayed in light of the COVID-19 pandemic and the above-mentioned economic support that is to be provided to taxapyers.

Accordingly, National Treasury indicated that the implementation date for the amendments to the assessed loss rules be moved to “at least” 1 January 2022. It is not indicated whether this delayed implementation date may also impact the possible future date upon which South Africa’s corporate income tax rate is reduced, but given the Budget Review’s proposal to expand the corporate tax base with a view to reducing the corporate income tax rate, it is likely that the reduction of the corporate income tax rate may similarly be delayed.

Author: Alexa Muller, Tax Specialist, PKF Cape Town