The National Treasury has looked to amend three areas in our income tax legislation to provide fiscal space. How does this affect your company?
During the February 2021 Budget Speech, then Finance Minister Tito Mboweni made the exciting announcement to the approximately 2.5m corporate taxpayers that the corporate tax rate for tax years of assessment commencing on or after 1 April 2022 will be decreased from the current 28% to 27%. Apart from accountants likely to adjust deferred tax balances for companies, the first real impact of the rate reduction will be seen in the 2023 calendar year.
Without a substantial windfall to the fiscus that can absorb the loss from the rate reduction, the National Treasury has looked to amend three areas in our income tax legislation to provide some fiscal space. Cognisance must be taken of those now.
Restricting the set-off of balances of assessed loss for companies
In determining taxable income, taxpayers are currently allowed to set off their balance of assessed losses carried forward from the preceding tax year against their income. An unutilised assessed loss balance may be carried forward to future years of assessment to be set off against future income (provided that the taxpayer’s trade continues without interruption).
While such restrictions on the utilisation of balances of assessed losses are often imposed on a time-based methodology (particularly in Africa), National Treasury has decided to instead look at a value restriction.
The effect of the proposed restriction is that only companies that would be in a positive taxable income position before setting off the balance of assessed losses would be affected. This approach is viewed as reasonable and one that affects all businesses more equally, rather than restricting the number of years for carrying forward assessed losses, which would disproportionately hurt businesses with large initial investments or long lead times to profitability. The proposed amendment is expected to affect (initially, at least) approximately 200 000 corporate taxpayers in South Africa.
How does this affect your company, and what should you do? As a starting point, if your company is in a loss position, ensure that those losses have, in fact, been crystallised through income tax assessments with the SA Revenue Service (Sars). How the proposed loss-restriction regime will impact your company’s future tax position is directly related to its balance of assessed loss carried forward: engage with your tax practitioner and ensure that your filings are up to date. Significant share transactions for companies in assessed loss positions exceeding R50m are specifically reportable to Sars, with defaults resulting in the imposition of penalties up to R3.6m.
Secondly, if practical and commercially feasible, consider the timing of entering into projects and agreements and aim to utilise losses as quickly as possible. Each year of assessment that a portion of the loss is carried forward to a subsequent year makes the loss less valuable, given the time value of money.
The government is systematically reviewing all business tax incentives in order to repeal those that are redundant, inefficient or inequitable. During 2020, sunset clauses were included with various incentives that previously had no end dates. Incentives and allowances that have been (or soon to be) on the chopping block are 12J (venture capital companies), 12F (airports and port assets), 12DA (rolling stock), 13sept (low cost residential) and 12O (films). All other incentives are currently in review and capitalising on available ones could provide for a welcome windfall.
What is still available to capitalise on? While the section 11D research and development incentive appears to be safe for now, government called for comments on a discussion paper earlier in the year, which will be considered by the National Treasury and the Department of Science and Innovation during 2021 to determine its efficacy.
Although not yet promulgated, the section 13quat urban development incentive has been extended until 31 March 2023, but this appears only to be the case since government needs more time to review its effectiveness in achieving its objectives to be conducted – this one appears to be headed to the history books soon.
To encourage skills development and job creation, the learnership tax incentive in section 12H provides employers with an additional tax deduction over and above the normal remuneration that can be deducted. Also not yet promulgated, the extension of this incentive (one of the oldest and most used) until 1 April 2024 seems likely.
The main aim of these rules is to limit excessive interest deductions in respect of debts owed to persons not subject to tax in SA. Areas of the proposed amendment include the formulas that quantify deductions to be made and what constitutes “interest”. Any companies with cross-border interest should be aware of the proposed amendments, which have been debated in Parliament on 6 September 2021, and which should be finalised during November 2021.
Without significant economic growth to increase activity, employment and bringing more persons (natural or corporate) into the tax base, it appears as though government has very little fiscal space to reduce the corporate tax rate without cutting back on other favourable regimes. It really seems to be a case of “from the right pocket to the left”, and one cannot help but wonder if the limited resources available in government should rather be deployed to areas such as the ease of doing business in an over-regulated private sector and stimulating the economy.