What are the new assessed losses rules?
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.
Under the new rules, assessed losses brought forward from a previous year of assessment can only be offset against the higher of R1m or a maximum of 80% of taxable income for the current year.
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 R1m, irrespective of the brought forward assessed loss balance.
Therefore, companies with a taxable income below R1m will not be affected by the new rules and companies will not forfeit the balance of the assessed loss not used in a year. The balance can be carried forward to the next tax year, provided that the company earns trade income in the following year.
However, if a company does not trade for a full year of assessment and no income is earned from such trade, the assessed loss may be lost.
When do the new rules apply, and which companies are affected?
The new rules apply to the years of assessment ending on or after 31 March 2023, which means years of assessment from 1 April 2022 onwards and applies to assessed losses generated prior to and after 1 April 2022.
Some companies will not be affected immediately, for example, companies with no assessed loss balance, or those with a taxable loss.
The cash flow implications, with examples
For those companies affected, the changes will have tax cash flow implications, best illustrated by the way of examples –
| Example 1 | Example 2 | Example 3 | |
| Previous Rules | |||
| Taxable Income | 500 | 500 | 500 |
| Assessed loss balance b/f | 1 000 | 475 | 200 |
| Taxable income | – | 25 | 300 |
| CIT @ 28% | – | 7 | 84 |
| AL balance c/f | 500 | – | – |
| New Rules | |||
| Taxable Income | 500 | 500 | 500 |
| 80% of taxable income | 400 | 400 | 400 |
| Assessed loss balance b/f | 1000 | 475 | 200 |
| % of taxable income | 200% | 95% | 40% |
| Taxable income | 100 | 100 | 300 |
| CIT @ 27% | 27 | 27 | 81 |
| AL balance c/f | 600 | 75 | – |
| Change in tax liability | |||
| CIT pre-change (no restriction on assessed loss balance) | – | 7 | 84 |
| CIT post-change (restriction on assessed loss balance) | 27 | 27 | 81 |
| Difference | 27 | 20 | (3) |
