There are two significant changes on the tax-front that would almost certainly impact your business:
- The income tax rate for companies decreased to 27% (previously 28%), and
- There are new limitations on how assessed losses can be used to decrease taxable income.
In the past companies were usually able to utilise 100% of their assessed losses against taxable income, resulting in no tax liability for that year.
Please note that “taxable income” is essentially the “profit” that remains for tax purposes, not the total turnover/sales for the year.
The amendment to section 20 of the Income Tax Act will limit the utilisation of assessed losses for companies to the higher of R1m or 80% of taxable income.
Example 1
Assessed loss carried forward from previous year: R 4 000 000
Taxable income: R 3 000 000
The higher of R1m or 80% x R3m = R2.4m.
The company will be able to utilise R2.4m of the assessed loss against taxable income.
Taxable income for the year R 3 000 000
Less assessed loss utilised (R 2 400 000) i.e. higher of R1m or 80% of TI
Remaining taxable income R 600 000
Tax rate 27%
Tax payable to SARS R 162 000
The remaining assessed loss of R1.6m (R4m less R2.4m utilised) would carry forward to the next year of assessment.
Example 2
Assessed loss carried forward from previous year: R 1 500 000
Taxable income: R 2 000 000
The higher of R1m or 80% x R2m = R1.6m.
The company will be able to utilise the full R1.5m assessed loss against taxable income.
Taxable income for the year R 2 000 000
Less assessed loss utilised (R 1 500 000) i.e. higher of R1m or 80% of TI
Remaining taxable income R 500 000
Tax rate 27%
Tax payable to SARS R 135 000
There is no assessed loss remaining in this example to carry to the next year.
Example 3
Assessed loss carried forward from previous year: R 4 000 000
Taxable income: R 350 000
The higher of R1m or 80% x R350k = R280k.
The company will be able to utilise the full R350k assessed loss against taxable income.
Taxable income for the year R 350 000
Less assessed loss utilised (R 350 000) i.e. higher of R1m or 80% of TI
Remaining taxable income R 0
Tax rate 27%
Tax payable to SARS R 0
The remaining assessed loss of R3 650 000 (R4m less R350k utilised) carries forward to the next year.
Companies that made a loss in the current year won’t be affected. The 80% limitation is only applicable where a taxable profit was made during the year.
Smaller companies with taxable income below R1m are therefore not affected – they can utilise their full assessed loss against their taxable income.
This would become relevant for the first time when we do provisional tax calculations in August (for February year-end clients) for the current tax year.
If you are not a client of Wingman, please feel free to contact us to provide advice on how these changes would impact your business.
