CA Viewpoint November 2022

Dear FC client

IMPORTANT DATES

Please take note of the following important dates:

  •  Income tax season 2022 closing (provisional taxpayers)   23 January 2023
  • Income tax returns for trusts for 2022                                  23 January 2023
  • Second provisional submissions for 2023                            28 February 2023
  • Corporate income tax submission for 2022                         28 February 2023

We are at the end of the 2022 year and it has been a learning experience. As South Africans we face operating challenges on a daily basis. During this time of the year, we reflect back and start planning for the next year. Each South African has a tenacious spirit and the challenges now only seem to be part of our motivation to achieve our goals for the new year.

Please contact us to help you achieve your financial goals.

Contact us for more information.

Kind regards,
The FC CA team

CORPORATE INCOME TAX PLANNING

We have compiled this newsletter as a guide to be used by the business executives of South African companies in calculating the assessed loss and to identify the risks currently posed to the assessed losses that have been carried forward from prior years of assessment.

The Income Tax Act 58 of 1962 defines an assessed loss as an amount in the current year of assessment after the deduction of admissible deductions has been made against admissible income. The definition does not include a specification on a trade however, a trade should be carried on for the deductions to be admissible. The assessed loss is only carried forward from the immediately preceding year of assessment.

Section 103(2) of the Income Tax Act empowers the Commissioner for the South African Revenue Services (SARS), to disallow the setting-off of an assessed loss against the taxable income generated by a company if the following requirements are met:

  • There has been a change in the shareholding of the company to be sold or an agreement affecting the shareholding of a company to be sold;
  • The agreement has been entered into mainly for the purpose of utilising any assessed losses and the transaction will result in a corporate tax liability to be avoided;
  • The agreement will or has resulted in a direct or indirect change in the income accrued to that company during the coming years of assessment.

In a practical example where the Commissioner disallowed the assessed loss to be utilised in the company purchased by the shareholders, we refer to the court case SARS vs ABC (Pty) Ltd.

In practice, there are shareholders that hold shares in more than one company. One of the companies may be thriving and be declaring a taxable profit year on year, and the other a loss. In this instance, it should be considered that the company incurring a loss should rather be liquidated, winded up or deregistered in an effort to consolidate operations. During the course of the winding-up of the company, all assets need to be distributed to the shareholders or to companies that form part of the same group on the date of disposal.

We propose that Section 47 of the Income Tax Act be utilised in the above scenario where the transaction is between two South African companies with common shareholders with the intention of being tax compliant in all respects. The requirement for the transaction is set below:

  • The disposal of capital assets or assets that constitutes an allowance asset will be deemed to have been disposed of for an amount equal to the base cost of that asset on the date of the disposal thereof, therefore no capital gain will be payable by the liquidating company.
  • No debt by the shareholders was incurred on behalf of the liquidating company within a period of 18 months before the disposal.

The Income Tax Act therefore clearly concludes that the assessed loss in the liquidating company will not be able to be carried over to the holding company/common shareholders. A management fee transaction between the two companies will rather be the suggested solution. The actual payment of the management fee will also need to be made in order to constitute this as a valid transaction.

In order for the assessed loss to be utilised, the requirements for a trading company should be met. The risk for the Commissioner reducing the assessed losses carried forward from prior years are as follows:

  • The assessed loss in a company may be reduced by the Commissioner if trade has ceased during the year of assessment or immediately preceding the year of assessment.
  • Paying for the basic operating expenses of a company through a loan account or bank account does not constitute a trade.
  • Receiving investment income from investments made by the company does not constitute a trade.
  • Fictitious sales invoices for services not actually rendered and non-payment of sales invoices will also not constitute as a trade.

In conclusion, the risk of the reduction of an assessed loss should always be known to the shareholders. This is especially the focus area of SARS at the moment with the lowering of the corporate income tax rate from 28% to 27% and the partial allowance of the assessed loss to be utilised in a year of assessment. Shareholders should contact us for more information and tax planning advice.

SPOTLIGHT: THE SUNPAYS

We have a new monthly section where we will be giving a general overview of one of our clients. We see it as a networking segment where we introduce a company to your network. It is a free opportunity for you to inform our readers about your company and what you do. If you are interested send a short profile about your company and what you do as well as your company logo and contact details.

In this month’s issue, we would like to introduce THE SUN PAYS

The Sun Pays is a reputable company supplying solar products since 2007 locally and to neighbouring countries.

The Sun Pays supply solar products from basic back-up systems to complete off-grid systems according to customers’ needs. We aim to supply high quality products at affordable prices for the most cost-effective systems.

Our product range includes solar panels ranging from 340Watt to 550Watt, inverters, lithium batteries and most accessories needed for installation.

Part of our service delivery is technical support and repairs. We are available for telephonic, WhatsApp, e-mail or face to face support and enquiries.

The Sun Pays has an online ordering platform that is easy and convenient to use.

Please feel free to contact us on 012 734 0915 or visit our website www.thesunpays.co.za
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