Reduction of the corporate tax rate - good news but not without a snag …

In the National Budget Speech, Minister of Finance Enoch Godongwana announced that the corporate tax rate will be reduced to from 28% to 27% with effect from years of assessment commencing on or after 1 April 2022.

This change in the corporate tax rate triggers the recent amendment of section 20 of the Income Tax Act, No. 58 of 1962 with the same effective date.

For years of assessment ending on or after 31 March 2023, there will be a limit on a company’s brought forward assessed loss that will be available for set off against taxable income. The assessed loss available for set off against taxable income will then be limited to the higher of either: 80% of the taxable income for that year before considering the assessed loss brought forward, or R 1 million.

This amendment was first introduced by then Finance Minister Mboweni in the 2020 budget speech. The change was initially proposed to also be effective for years of assessment commencing on or after 1 April 2021 but was postponed due inter alia to Covid 19.

National Treasury advised that this limitation goes hand-in-hand with another base-broadening measure, namely amendments to the interest deduction limitation rule in section 23M of the Income Tax Act.

Small companies are protected, to a certain degree in that assessed losses below R 1 million will not be affected by the set-off limitation.

Companies in a taxable loss position for a specific year before the set off of a brought forward assessed loss, will not be affected by this limitation in that year either.

Capital losses available for set off against future taxable capital gains are not affected by this set-off.

Taxpayers need to carefully consider the impact of this new assessed loss limitation rule not only when submitting their future tax returns, but also in estimating their provisional tax liabilities.