Budget 2020 | Assessed Losses and how your Signage business could be affected

As a signage company owner or signage franchisee, your machinery investment is key to your differentiation, as this is one of the direct drivers of quality. Wear and Tear allowances or accelerated write-offs (for Small Business Corporations) weigh heavily on your decision to invest in machinery or not, as the income tax allowances offered as a consequence of these investment decisions, directly affect your cash flow. These write-offs place many signage companies in an advantageous assessed loss position with the South African Revenue Service (“SARS”).

Where any entity, including a signage company, in the ordinary course of business finds itself in a position that its taxable income is exceeded by income tax deductions, a tax loss arises (known as an “assessed” loss once confirmed by SARS during assessment), which can be offset against taxable profit in future years, saving your signage business in cash outflows to SARS for income tax payments.

This is set to change for years of assessment commencing from 1 January 2021, as the offset of assessed losses carried forward will be capped at 80% of taxable income in the year of assessment. For a signage company with a historic assessed loss, this means that it will start paying tax even though it is trading in an ongoing loss state for tax purposes.

To illustrate the impact of this change, see the example below:

		Current	Proposed
	Year 1	Year 2	Year 2
Current year taxable income/(loss)	(100 000)	75 000	75 000
Application of assessed loss	0	(75 000)	(60 000)
20% of taxable income subject to tax	0	0	15 000
Assessed loss brought forward	0	(100 000)	(100 000)
Assessed loss carried forward	(100 000)	(25 000)	(40 000)
Tax @ 28%	0	0	4 200

 

Signage companies that are in recessionary financial hardship or have invested in capital expenditures that depended on utilizing assessed losses will be most affected.  Forward planning will be vital to navigate this important change in the SA taxation landscape.

Signarama is Southern Africa’s largest signage franchise group.  Our philosophy includes equipping our franchisee family with information to make informed business decisions.  If you are seeking to join a franchised group at the forefront of the signage industry, reach out to us for a confidential discussion.