In South Africa, many businesses incur losses at various stages of their lifecycle. When a business closes, taxpayers often wonder what happens to their assessed losses—can these losses be carried forward and used against future income? This detailed guide explains the rules surrounding assessed losses, how they can be carried forward after business closure, and important considerations for taxpayers to maximize tax benefits under SARS regulations.
What are Assessed Losses?
Assessed losses occur when allowable deductions and expenses exceed the taxable income in a particular year of assessment. These losses are recorded by SARS and can generally be carried forward to offset against future taxable income, reducing tax liabilities.
Carrying Forward Assessed Losses
According to South African tax law, assessed losses can be carried forward indefinitely to future tax years until fully utilized. However, there are specific rules when the business that generated the loss closes or changes ownership:
- Business Continuity: If the business continues under the same or a related entity, losses can be carried forward as usual.
- Business Closure: When the business closes and there is no continuation or similar business, the ability to utilize assessed losses depends on future income sources and SARS approval.
- Change in Shareholding: If a company undergoes a change in ownership, SARS applies anti-avoidance rules which may limit the use of assessed losses.
Using Assessed Losses After Business Closure
If an individual or entity closes a business but starts a new business or earns taxable income from other sources, they may be able to apply the assessed losses against that income, provided:
- The losses are properly recorded and declared in prior tax returns.
- The new income is from a business or source that SARS deems sufficiently connected to the previous trade.
- SARS approval may be required if there is a substantial change in business activities or ownership.
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Important SARS Provisions and Limitations
- SARS requires that the assessed loss be genuine and arise from allowable deductions.
- Anti-avoidance provisions may prevent the use of losses if the taxpayer attempts to artificially create losses or manipulate transactions.
- Losses cannot be used to offset income from unrelated sources without SARS approval.
- Taxpayers should keep thorough documentation of all business activities and losses incurred.
Steps to Maximize Loss Utilization After Closure
- Ensure all losses are properly declared and assessed by SARS before business closure.
- Maintain detailed records to demonstrate the link between previous and current income sources.
- Consult a tax professional to evaluate whether losses can be utilized against other income.
- Consider applying for SARS consent if planning to use losses in new or unrelated ventures.
Conclusion
Assessed losses provide valuable tax relief opportunities even after business closure, but their utilization is subject to SARS rules and anti-avoidance provisions. Careful planning, proper documentation, and professional advice are essential to ensure that assessed losses are maximized without running afoul of tax laws.
For tailored advice on carrying forward assessed losses and tax planning after business closure, contact experienced South African tax consultants.
