The National Treasury (“NT”’) published its draft Taxation Laws Amendment Bill with accompanying Explanatory Memorandum on 28 July 2021 (the “draft Bill”). By now it is well known that the draft Bill contains a fairly radical proposal: section 20 of the Income Tax Act, 1962 (“the Act”) will be amended to limit the amount of an assessed tax loss that may be set-off against taxable income.
The current proposal is to limit the assessed loss to 80% of the “taxable income” derived in any one year of assessment. For example, a corporate taxpayer with taxable income of ZAR500, and an assessed tax loss carried over from previous tax years, will only be able to set off a maximum of 80% of that loss against its taxable income (thus, a maximum of ZAR400 will be allowed as a set-off, regardless of whether the actual assessed tax loss is much greater). The effective date is proposed as 1 April 2022.
The NT has explained that the rationale for the amendment as follows:
- The tax base will be broadened and, concomitantly, the corporate tax rate reduced. Readers are reminded that the corporate tax rate will be reduced to 27% (from 28%) with effect from 1 April 2022. The question arises whether the planned 1% reduction in the corporate income tax rate will sweeten the deal.
- Corporate income tax collection is volatile. Thus, limiting assessed losses will secure a steady stream of tax revenue for the fiscus.
- The amendment will aid in curbing tax avoidance.
What has not been analysed in detail, is the specific impact this proposed amendment will have on specific sectors of the economy. The amendment will not result in a minimum tax for all corporate taxpayers. However the change will be material to many cash-strapped businesses that have weathered the economic gloom. This proposal could be particularly adverse to start-ups, micro-and small businesses, and companies in both the agricultural and mining sectors.
Impact on the agricultural sector
The agricultural sector is of particular concern. Agriculture is by its nature cyclical: yields span over many years. For example, fruit orchards may take up to eight years to bear fruit and to start generating income. The set-off of assessed tax losses from one year to the next aids in financing much-needed investment for the next cycle. Thus, limiting the set-off of assessed losses against taxable income earned could severely impact further investments and exacerbate the cash-flow constraints already experienced in the development years. This is likely to be particularly harsh to new and emerging farmers. Aside from the seasonal nature of yields, the agricultural sector is of course particularly susceptible to external factors such as the drought that has plagued the Northern Cape for the last couple of years. We understand from our agricultural clients that the proposed amendment will be adverse to food security and may lead to a further increase in food inflation.
Impact on the mining sector
Not too dissimilar from agriculture, the volatility of the price of commodities also makes the mining sector vulnerable to the proposed limitation of setting off assessed losses. The sharp increase in commodity prices and exports over the last year, for example, has secured a welcome windfall for the state’s coffers in both corporate tax and mineral royalties. The cycle won’t last forever.
As the NT recognises, the collection of corporate income tax is volatile. This is especially the case in South Africa where the agricultural and mining sectors contribute significantly to the economy.
It will be interesting to see what submissions are made in relation to this proposed amendment and whether it is enacted into law in its current form.