Assessed Losses Brought Forward: No Longer a Guarantee of Tax Relief Under New Rule

Companies with prior assessed losses were previously able to carry forward those losses and use them to offset taxable income, resulting in a reduced or zero tax liability.
However, the rules regarding assessed losses have changed, and this is no longer the case.

Be aware, this rule has changed and now applies to any year of assessment that began on 1 April 2022 onwards.

What happens under the new rule?

Assessed loss brought forward from prior years of assessment can only be offset against a maximum of 80% of taxable income
or R1 million, whichever is higher.
This means that smaller companies with taxable income of below R1 million will not be affected by this new rule, and
100% of their assessed loss can be utilised.

What this means?

For companies with taxable income that exceeds R1 million, they will be paying tax on up to 20% of taxable income
even if the assessed loss from prior years far exceeds the taxable income.

This is a significant change that may have a considerable impact on their cash flow, and they must adjust their cash flow forecast accordingly

Contact us

The old and new rule are both complex especially when you start considering factors such as the ring-fencing of losses
and the 3-out-5 years rule.
As such, professional advice is essential, and companies are encouraged to contact one of our BVSA branches to discuss this further.

To illustrate the impact of this new rule, let’s consider a few examples.

In conclusion, it’s important for all companies to be aware of the changes in the assessed loss rules and adjust their cash flow forecast accordingly. Seeking professional advice can help companies understand how the changes affect them and what steps they can take to minimize the impact.

 

Article written by Melissa Edwards
Tax Manager | BVSA Gauteng
melissae@bvsa.ltd