Treasury proposes restrictions on assessed losses to help lower corporate income tax

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National Treasury and SARS published draft tax bills for public comment this week.
National Treasury and SARS published draft tax bills for public comment this week.
Thana Prasongsin/Getty Images
  • National Treasury earlier this week published draft tax bills for public comment.
  • Notably, there are plans to restrict assessed losses that companies can carry forward into a new year, which means they may have to pay more tax.
  • Among other key proposals affect people reaching retirement and those emigrating, Treasury also aims to clamp down on abuses with anti-avoidance measures.

Treasury and the South African Revenue Service (SARS) have published proposals to restrict assessed losses for businesses, which could help lower the corporate income tax rate.

The draft 2021 tax bills - the Rates and Monetary Amounts and Amendment of Revenue Laws Bill, the Taxation Laws Amendment Bill and the Tax Administration Laws Amendment Bill - were published for public comment this week. They contain tax proposals made in the 2021 Budget announced on 24 February.

Among the proposals include restrictions on assessed losses that can be carried forward by a business into the next financial year.

For example, if a business made a R100 000 loss in one year, they would normally carry forward the whole amount into the next financial year. If the business happened to make a R100 000 profit in that year, it would essentially cancel out the loss of the previous year and they would not be taxed on profits.

But businesses will now only be able to carry forward 80% of their assessed losses. So if you made a loss of R100 000 in one year, you can only carry forward R80 000. That means the hypothetical profit of R100 000 made in the next year would be reduced to R20 000 - which is taxable. This amendment will be effective from 1 April 2022.

Jean Du Toit, head of tax technical at Tax Consulting South Africa, highlighted that this is part of Treasury's aim to create space to reduce the corporate income tax rate from 28% to 27%, as announced by Finance Minister Tito Mboweni earlier this year.

Billy Joubert, senior associate director at Deloitte South Africa, said that essentially government was "giving on one hand" and "taking away" from the other. 

Ultimately lowering the corporate income tax rate will be a good - as it will attract investment, Joubert said. "They [government] are wanting to do it without losing tax revenues, and the way they do that is to limit the extent to which companies can use assessed losses," he said.

In its Budget Review, Treasury said it was reducing the number of tax incentives, expenditure deductions and assessed loss offsets - with the aim to lower corporate income tax. "These changes are expected to enhance efficiency, transparency and fairness in the business tax system, while facilitating economic growth through improved investment and competitiveness," the Budget Review read.

Treasury said that reducing the corporate income tax rate is expected to have a positive effect on wages and employment and will promote additional investment.

"We can't afford to give up tax revenue, but by limiting assessed losses we can bring down the corporate tax rate. The lower you can make your rate, the better," Joubert added.

Among other measures include curbing abuses on the Employment Tax Incentive. Du Toit highlighted that some employers were wrongfully claiming to have employees to benefit from the incentive. For example, they would list a student or someone on a training programme at the company as having an employment contract - when that is not necessarily an employment relationship. The definition of "employee" will be amended to clarify what constitutes an employment relationship in order for the company to be eligible for the incentive.

There are also proposals to curb abuses related to wealth transfers related to trusts. People have started creating fake loans to put assets into trusts, in order to escape tax liabilities, Du Toit explained. But government has since introduced anti-avoidance provisions through section 7c of the Income Tax Act. "They [government] had to keep changing it every year because people find new schemes to get around the law," he said. "It is clear that government is intent on closing any loopholes around trust structures," he added.

Other proposals include increasing flexibility for retirement fund members - which are currently restricted in terms of the annuities they may acquire, Du Toit said.

Those emigrating also need to be aware of changes which may impact their retirement fund, said Joubert.

To prevent retirement interests from escaping taxation in South Africa after a person ceases residency, it is proposed that an individual will be deemed to have withdrawn from their retirement fund on the day before they cease residency, triggering a South African tax liability, Du Toit said. This is essentially an exit charge - but which is only payable upon withdrawal, he added. "The tax will be levied on the value of the interest on the day prior to ceasing residency and will be calculated in terms of the lump sum tax tables prevailing at the time of payment," he said. The provision comes to effect on 1 March 2022. 

Du Toit said that taxpayers should speak to their advisors to understand how the proposed changes will affect them. "In particular, South Africans who plan on leaving the country and ceasing tax residency must ensure they are planned optimally ahead of the effective date in 2022," he said.

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