Navigating assessed losses: Where do we stand?

The assessed loss provisions contained in sections 20 and 20A of the ITA have been a focal point over the years for both individuals and companies seeking to reduce their taxable income. Originally introduced to alleviate the tax burden imposed on businesses that require high amounts of capital expenditure to start up, the assessed loss provisions have in certain circumstances been used as a tax tool to alleviate the payment of tax on the taxable income of a company or individual conducting a business.

21 Feb 2024 2 min read Special Edition Budget Speech Alert 2024 Article

Essentially, an assessed loss incurred by a taxpayer during a year of assessment that has not been used in that specific year of assessment, can be rolled over and set-off against their future taxable income, reducing their taxable income in future years of assessment.

Assessed loss set-offs are available to both individuals and companies, with varying restrictions detailed in the ITA applying to each type of taxpayer. While individuals are entitled to the full benefit of their assessed loss set-off, the prior updates to sections 20 and 20A introduced what is known as the 80/20 rule. This rule was specifically directed towards companies (being implemented at the same time as the reduction in the corporate tax rate to 27%) and meant that companies could only set-off their assessed losses against 80% of their taxable income or R1 million, whichever was higher, with any balance rolling over to the subsequent years of assessment.

The net result being that companies would not be able to entirely hide behind their assessed loss in order to avoid paying taxes on their taxable income. Companies would end up paying tax on at least 20% of their taxable income in any given year of assessment, albeit at the reduced rate of 27%.

One anomaly of the 80/20 rule is that it arguably failed to consider circumstances where a company would not be able to set-off the remainder of its assessed loss in the following year of assessment – e.g. where the company is in liquidation, winding-up or deregistration – until now.

The proposal in the Budget suggests amending the 80/20 rule to exempt its application to any company that finds itself in liquidation, winding-up or deregistration. This means that the entirety of a company’s assessed loss can be used against its taxable income when that company is facing liquidation, winding-up or deregistration.

Although seemingly inconsequential, the proposal will bring relief to companies in financial distress and that there may be more funds to distribute to the creditors, employees and shareholders of a company with the result being that distributions are directly returned to the tax base.

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