19 August 2021 Tax & Exchange Control Alert

Assessing the losses: Draft TLAB proposes restrictions on the use of assessed losses

Suffering financial losses is a near inevitable part of doing business. International and South African tax policy has customarily allowed taxpayers that expend more than they earn to set off these losses against current or future income. This shields start-up businesses yet to turn a profit and cyclical businesses subject to low income or high expenditure periods from a tax cost until the income earned is deemed sufficient to warrant a tax burden.

South Africa has historically taken a generous position on the use of assessed losses by taxpayers by allowing the full extent of assessed losses to be set off against current income and any remaining balance to be carried forward to be set off against future income. Section 20 of the Income Tax Act 58 of 1962 contains the provisions dealing with the use of assessed losses. Section 20 provides that where a taxpayer carries a balance of an assessed loss from any previous year, this balance may be set off against the taxable income earned in the current year. Meaning that where a taxpayer has incurred a great loss in previous years, this loss may be set off against taxable income until the full loss is exhausted.

In the 2020 Budget Speech, the Minister of Finance announced that government intends to reduce the ability for corporate taxpayers to set off past assessed losses. This announcement and proposal were discussed in our 2020 Special Budget Alert.

The proposal to restrict the use of assessed losses by corporate taxpayers is now contained in clause 19 of the Draft 2021 Taxation Laws Amendment Bill (Draft TLAB). Public comments are open on the full Draft TLAB and written submissions are to be submitted to the National Treasury at 2020AnnexCProp@treasury.gov.za and the South African Revenue Service at acollins@sars.gov.za by close of business on 28 August 2021.


The explanatory memorandum to the Draft TLAB (Memo) indicates that Government has proposed restricting the use of assessed losses, mainly in order to provide it with alternative revenue to facilitate the lowering of the corporate tax rate to below the current 28%.

The Memo also notes that the proposal is in line with international tax policy trends. It states that:

In 2015, out of a group of 34 OECD [Organisation for Economic Co-operation and Development] and non-OECD countries, 16 countries limit carry-forward periods to between three and 20 years, while eight countries limit the amount of tax losses that can be offset in any given year. The latter are restricted to a percentage of either taxable income (ranging from 50 to 80%) or accumulated assessed losses (ranging from 25 to 50%) per year.

Clause 19 of the Draft TLAB proposes that corporate taxpayers be limited to setting off a maximum of 80% of any balance of assessed loss carried from any previous tax year. Therefore, despite carrying a balance of an assessed loss, corporate taxpayers will always face taxation on at least 20% of their taxable income for a given year.


While the proposal does remove some of the shielding provided to taxpayers who have suffered significant assessed losses, it allows the majority of an assessed loss to be utilised and the balance carried forward to subsequent tax years. Meaning the full assessed loss may still be utilised, but over a longer period.

The indications from the policy pronouncements are that the proposals are part of a set of measures aimed at ensuring there is sufficient fiscal space for a reduced corporate income tax rate. However, it remains to be seen whether corporates and investors value the certainty of a lower corporate income tax rate more than flexibility in the system of taxation, which takes into account the economic position of businesses that have suffered significant past losses and may yet struggle with cash flow constraints.

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