Saving your assessed losses

An assessed loss can be a valuable asset that helps you pay less tax – but it must be protected.

Peter o’Halloran - Tax advice

One way to bring down the tax liability of a business, whether a sole proprietor or a company, is to keep the assessed losses alive.

Of course, an assessed loss is not a good thing, as it means that a company has lost money in a year. However, the business has in effect ‘paid’ for the loss (because it cost money). Therefore, it should be safeguarded as it is, in a sense, an asset.

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Accounting professionals call this deferred tax. The business is able to write the loss off in a subsequent year when the profits are better. It then pays far less tax in that year than it would have without the loss. So it’s a real tax saver.
So, how can a loss be lost? Liquidating a business is one way. When a company is sold, SARS makes it very difficult for the owners to utilise the assessed loss – because the asset that is the assessed loss is now gone.

An alternative: compromising
Of course, if the business is losing money, the owners might well make a plan with creditors to keep it afloat. This could take the form of a compromise, whereby creditors agree to accept a lower amount of money. This allows the assessed loss to be written off. Lack of trade in a business for longer than one year triggers the statutory provision that the loss cannot be taken into account in a subsequent tax year. ‘Trade’, by the way, means more than just meetings – there must be activity resulting in income and, preferably, even some profit.

Tax scheme: a word of caution

Another way of saving tax is to set up the business as part of a tax scheme. Some advantage might accrue to you by running another business at a bit of a loss. With some imagination, it’s easy to see how well this could work.
Beware, though: SARS is wise to such a ploy. If the business does not have a prospect of making profit at some stage, the law will regard the expenditure as not having gone into the business in order to produce income, and the tax scheme will become null and void.

If you want to put such a scheme into operation, make sure that your game plan includes the potential for paying tax at some point. In other words, don’t be too aggressive with such a tax scheme.

Starting a business from scratch

Often, people start businesses because they have little choice. They have some funds, some skill and another avenue of income has closed, forcing them to use what they have. It’s a fairly common scenario in South Africa.

All too often, tax compliance takes a back seat to making a living. And invariably, the first year or two shows a financial loss.

Frequently, because of this loss, the first year or two are not reported and SARS receives no tax return. This can result in the write-off of the valuable assessed loss because SARS might then estimate a zero income return. If uncontested, this becomes final, and the loss unusable.

The bottom line is: seek expert advice on an assessed loss; here’s an advantage you don’t want to lose!

This article was originally published on 11 March 2016 in Farmer’s Weekly.