When the tax-deductible expenses of a company exceed the income derived by it in a YOA, an assessed loss is realised. Such an assessed loss may be carried forward to the next YOA and may be used to decrease the taxable income of the company in that next YOA.
To the extent provided for in section 20 of the Act, the full amount of that assessed loss may be used to reduce the taxable income generated by a company in a subsequent YOA. Furthermore, if the assessed loss is greater than the taxable income in that subsequent year, the balance of the assessed loss not utilised may be carried forward to the next year of assessment.
It has been proposed in the Budget that the offset of assessed losses that have been carried forward, be restricted to 80% of taxable income from the YOA, commencing on or after 1 January 2021. As such, if a company is in a taxable position before taking into account an assessed loss that is carried forward, that company will be liable to pay tax on at least 20% of its taxable income, regardless of whether the assessed loss carried forward exceeds the taxable income.
The proposed limitation is said to be in line with global trends and has been introduced in order to broaden the corporate income tax base.
It is possible that this proposed amendment will receive opposition from corporate entities as they will incur some measure of tax liability as soon as taxable income is derived, regardless of the extent of the assessed losses that may have been carried forward. This may be particularly problematic for entities with substantial start-up costs as the tax benefits in respect of losses incurred in the first years of operation will likely be limited during later YOAs.