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Assessed losses - a shocking proposal

Articles:

Assessed losses – a shocking proposal

27 February 2020

By Barry Visser, Tax Director & Bruce Russell, Tax Director and Jordan Gosling, Senior Tax Consultan |

With the 2020 budget speech done and dusted, the Minister of Finance has announced that the government intends to restructure the corporate income tax system over the medium term by broadening the tax base and reducing the corporate tax rate. The 28% corporate tax rate remains unchanged for the 2020/2021 years of assessment.

However, one of the shocking proposals announced at today’s Budget Speech by Minister Mboweni is to restrict the offset of assessed losses* against taxable income. The proposal, which is set to take effect for years of assessment commencing on or after 1 January 2021, intends to limit the offset of assessed losses carried forward to 80 per cent of taxable income. At this stage the proposal is unclear. For instance, it is uncertain whether the assessed loss carried forward and not permitted to be offset against taxable income qualifies to be carried forward for a further year. BDO hopes that National Treasury only seeks to increase the tax base in the medium term through early collection of corporate tax and as such will permit the further carry forward of assessed losses should the limit apply.

If the proposal is implemented as we hope, this means that companies will now start paying tax even if they are in assessed loss positions. The following example sets out how the proposal may be applied versus how the law currently applies:

		Current	Proposal
	Year 1	Year 2	Year 2
Taxable income/(loss)	(10 000)	2 000	2 000
Taxable income (Utilisation of assessed loss)	0	(2 000)	(1 600)
20% of Taxable income (Subject to tax)	0	0	400
Assessed loss brought forward	0	(10 000)	(10 000)
Assessed loss carried forward	(10 000)	(8 000)	(8 400)
Tax @ 28%	0	0	112

This will hit hard for companies coming out of hardship and those who has been investing heavily upfront with projections of not paying tax during these years but now will face adverse tax cash flow implications. Based on our current understanding of the proposal, or at least our hope, capital intensive projects generating significant historic assessed losses could be adversely affected by the proposal. These projects will usually be financed taking into account forecasted cash flows assuming, as would be permitted in terms of the law as it stands, that corporate tax is not payable for an estimated period. If the proposal is implemented, the concern may be whether such corporates would run into financial difficulties, as their forecast financial models and cash flows do not provide for cash outflows in the form of corporate tax. This result is hardly conducive to the goal of encouraging economic growth. We would encourage National Treasury to implement a forward-looking approach in implementing this proposal or extending the implementation date of the proposal.

*Where a company is carrying on a permissible trade and its qualifying income tax deductions exceed the taxable income for that year of assessment, a tax loss is created. Once assessed by SARS, this assessed loss may be carried forward to the following year of assessments being available to be utilised against the taxable income that arise in that particular year.