Corporate Income Tax down to 27% but beware the limitation rules.

The dust of the February 2022 Budget Speech has long settled. I however have been up to my usual research and detective mode as I needed more clarity in terms of the Limitation Rule that was coming into effect with the new reduced Corporate Income Tax (CIT) rate.

Corporate Income Tax (CIT)

South African-resident companies are subject to CIT on their worldwide income, irrespective of the source of the income. Non-resident companies are taxable on South African-source income.

For the tax years ending before 31 March 2023, the CIT rate applicable to the corporate income of both resident and non-resident companies is a flat 28%. This rate will be reduced to 27% for years of assessment ending on or after 31 March 2023.

Small Business Corporations (SBCs) will also enjoy the benefit of the reduced tax rate for tax years ending on or after 31 March 2022. The adjusted tax rates as set out on the SARS website:

Years of assessment ending on or after 31 March 2023:

Taxable Income (R) Rate of Tax (R)
1 – 91 250 0% of taxable income
91 251 – 365 000 7% of taxable income above 91 250
365 001 – 550 000 19 163 + 21% of taxable income above 365 000
550 001 and above 58 013 + 27% of the amount above 550 000

Source: South African Revenue Services

 

  • Qualifying criteria for SBCs:
    • Gross Income not exceeding R20 million p/a, and no more than 20 % of the receipts and accruals may consist of investment income or income derived from personal services
    • Natural persons only as owners/members
    • Business conducted as PTY, CC, Co-operation or Personal Liability company. Business may not be a Personal Service Provider

 

It is important to note that the commencement date for the reduced corporate rate will coincide with assessed loss limitation rules in terms of which corporate taxpayers will only be allowed to claim assessed losses against 80% of their income, as well as with the cross-border interest limitation rules where the deduction will be limited to 30% of ‘tax EBITDA’ (earnings before interest, taxes, depreciation, and amortisation.)

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Limitation of assessed losses

As per the Tax Laws Amendments Act 2021, the limitation of assessed losses became effective on 1 April 2022.

The principle: the amendment limits the loss you are allowed to claim against taxable income to a maximum of 80% of the taxable income for the particular tax year.

Example: taxable income for the year is R2,000,000 and the assessed loss carried forward is R5,000,000.

  • You will be allowed to claim an assessed loss carried forward, limited to a maximum of 80% of the taxable income, thus R2,000,000 x 80% = R1,600,000
  • Tax will remain payable on the balance of 20%, thus R400,000 x 27% = R108,000

NB – remember that this will also impact your provisional tax and your cashflow.

If you made a loss in the year of assessment, you pay no tax, and the accumulated loss increases.

The term for which assessed losses can be carried has at the time of writing this article not yet been finalised.

 

 

Created by: Renate Jute, CFP® | Registered Tax Practitioner ™

Director, Noble Prosperity

 

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