Corporate taxpayers and their assessed losses not out of the woods just yet, says BDO

In the 2020 budget speech, finance minister Tito Mboweni proposed that there would be a restriction on the carry forward of assessed losses to be set off against taxable income with impact on years of assessment starting on or after January 1 2021.

The proposed limitation provided that assessed losses incurred by corporate taxpayers in previous years of assessment would be limited to 80% of that entity’s taxable income.

The announcement was made before the pandemic, which forced SA and the world’s economies to come to a halt. Many enterprises incurred significant expenses to keep their trade afloat with no prospects of generating profit.

During the latter part of 2020, the National Treasury did not elaborate on its intention to implement the proposal, leaving taxpayers seeking guidance from the Draft Taxation Laws Amendment Bill published in July 2020.

With no announcements made regarding the amendment bill, corporate taxpayers were relieved not to have to forgo the resultant financial losses.

From the 2021 budget speech, it’s clear corporate taxpayers and their assessed losses are not out of the woods just yet. Mboweni proposed that the corporate income tax rate be lowered to 27% for corporate taxpayers, with years of assessment starting on or after April 1 2022.

This proposal does not come without a sacrifice.

The Treasury plans to enact a lower corporate tax rate alongside a broadening of the corporate income tax base by limiting interest deductions and assessed losses.

Mboweni has said that consideration to further decrease the corporate tax rate will be undertaken to make SA’s tax system more attractive. This task will be established in a revenue-neutral manner, engaging the Davis Tax Committee to ensure the reform is rolled out correctly.

Mboweni gave no further comment in his budget speech as to whether the assessed loss limitation will, in fact, be enacted in years of assessment from or after January 1 2021.

If the Treasury’s intention is to ensure that assessed losses are limited for years of assessment from or after January 1 2021, corporate taxpayers who have experienced their worst year of trade as a result of Covid-19 will be prejudiced.

The financial recovery time for corporate taxpayers cannot be predicted, and therefore on this basis alone, the Treasury should allow corporate taxpayers to carry forward assessed losses incurred in respect of the 2021 year of assessment onwards.

In an already strained economy, from a tax perspective, it cannot be beneficial to lower the corporate tax rate by 1% but limit the carry forward of assessed losses and deductibility of interest.

Certain small-, micro- and medium-sized enterprises are already enjoying preferential tax rates, and the limitation of the carry forward of assessed losses will not contribute to the government’s commitment to support their growth and development.

Perhaps the umbrella approach to limit assessed losses in respect of corporate taxpayers is not the best solution.

Further to the assessed loss prejudice expected by the corporate taxpayer, the limitation of interest deductibility proposed by the minister, seeks to deter the dilution of taxable profit with the opposite effect of deterring capital investment, especially when these investments are leveraged through external funding.

If the Treasury’s strategy is to revitalise the economy, tax support for capital investments should be a fundamental consideration.

Only time will tell whether sense will prevail, compelling the Treasury to reconsider its position on the limitation of assessed losses and interest deductibility, taking into account the financial impact of Covid-19 on the corporate taxpayer.

This article was paid for by BDO SA.