Good news for some taxpayers in South Africa

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The National Treasury has announced as part of the 2022 budget review that the corporate tax rate will be lowered to 27% for tax years that end on or after March 31, 2023. Practically, for most companies , this means that the reduced rate applies for the tax years. which start on or after April 1, 2022 and some companies can already benefit from the effect of the reduction in 2022 when paying provisional taxes. Businesses with February fiscal year ends, however, must wait until their fiscal year ends February 28, 2024 for the reduced rate to take effect.
However, the rate reduction comes at a cost to some taxpayers. The reduction in the corporate tax rate coincides with two changes made in 2021 to broaden the corporate tax base. The National Treasury indicates in the Budget Review that it expects the combination of the rate change and the two base broadening provisions to have no effect on tax revenues.

The base-broadening measures that accompany the rate reduction are, first, that companies can only use assessed losses carried forward on 80% of their taxable income for an assessment year. This means that a business will pay tax on 20% of its taxable income, even if it has a carried forward assessed loss greater than its taxable income for the year. The limitation does not apply if the assessed loss carried forward for offset against taxable income does not exceed R1 million. Some small businesses may therefore not be affected.

The second measure is the deduction of interest paid to persons with whom a taxpayer is in a controlling relationship is limited under Section 23M of the Income Tax Act. The scope of the provision has been expanded (both the circumstances and the amounts to which it applies). The rate of calculation of the limit has also been lowered to a flat rate of 30% of the debtor’s adjusted taxable income. Previously, this rate was determined at a base rate of 40%, adjusted according to the level of the average redemption rate.

The base broadening changes were introduced in 2021 with delayed effective dates linked to when corporation tax is first reduced following the Finance Minister’s announcement in the annual national budget. They apply with respect to taxation years beginning on that date.

These effective dates are the result of public consultations during which concerns were raised regarding the timing of the amendment, particularly with respect to the carryover of assessed losses. The concern was mainly that if companies use their cash to pay taxes on 20% of their taxable income, it could hamper their ability to recover from the effects of, among other things, the Covid-19 pandemic and the July 2021 unrest. The 2021 Amendments Response Document acknowledged that businesses have faced difficult economic circumstances, that some businesses are in survival mode, and that it is important to provide the space for recovery. The timing of the rate change and the entry into force of the base-broadening changes could come as a surprise to some, especially taxpayers who receive the Revenue Balancing Act from the National Treasury.

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