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South Africa

IAS 12 deferred tax in South Africa: IAS 12 as issued by the IASB (South Africa applies IFRS Standards as issued, without modification)

South Africa applies IFRS Standards as issued by the IASB without modification, including IAS 12. The corporate income tax rate was reduced from 28% to 27% for years of assessment ending on or after 31 March 2023. Entities that failed to re-measure deferred tax balances when the new rate was substantively enacted accumulated errors in their deferred tax computations. The 27% rate applies to all companies; there is no reduced rate for small companies in the income tax system (though a separate small business corporation tax table exists for qualifying micro-businesses, which is unlikely to affect entities preparing IFRS financial statements). South Africa's tax system includes several features that create distinctive temporary differences. The Secondary Tax on Companies (STC) was replaced by the dividends tax regime in 2012, but entities with legacy STC credits can use them to offset dividends tax. These credits create deferred tax positions that have been winding down but may still appear on balance sheets of entities that declared large dividends before 2012. The capital gains tax inclusion rate for companies is 80%, meaning 80% of a net capital gain is included in taxable income and taxed at 27%, giving an effective CGT rate of 21.6%. For investment property measured at fair value where the entity expects to recover through sale, this 21.6% rate (not 27%) should be used for the deferred tax calculation.

Regulatory context: Independent Regulatory Board for Auditors (IRBA); South African Revenue Service (SARS) for tax administration; Financial Sector Conduct Authority (FSCA) for listed entity oversight

The IRBA (Independent Regulatory Board for Auditors) conducts inspections of registered auditors and has identified deferred tax as a recurring finding. IRBA's 2023 Public Inspection Report noted that deferred tax was among the top five areas of audit deficiency. Specific findings included: auditors failing to recalculate the deferred tax computation independently, accepting management's computation without verifying tax bases to SARS assessments, and inadequate testing of the recoverability of deferred tax assets on assessed losses. The JSE (Johannesburg Stock Exchange) proactive monitoring process, conducted through its review of annual financial statements, has identified deferred tax disclosures as an area for improvement. The JSE noted that some entities did not adequately disclose the nature of temporary differences, the amount and expiry of unrecognised tax losses, and the basis for recognising deferred tax assets. The FSCA has supported these findings and encouraged entities to provide more transparent deferred tax disclosures.

Practical guidance for South Africa

South African practitioners should address four key areas. First, the 80% capital gains inclusion rate creates a different effective rate for temporary differences expected to reverse through capital gains (21.6%) versus those reversing through normal income (27%). This distinction is most relevant for investment property and other non-current assets that may be disposed of at a gain. IAS 12.51A through 51D apply: investment property measured at fair value carries a presumption of recovery through sale, so the deferred tax rate is 21.6%, not 27%. Rebutting this presumption requires evidence that the entity's business model is to consume the economic benefits through use. Second, South Africa's capital allowance system provides wear-and-tear allowances under Section 11(e) of the Income Tax Act (using SARS Interpretation Note 47 for prescribed rates) and manufacturing allowances under Section 12C (40% in year one, 20% per year thereafter). These accelerated allowances create taxable temporary differences. Section 12B provides accelerated allowances for renewable energy assets (50% in year one for solar panels, 100% for small-scale installations). The tax base of each asset depends on which section the allowance is claimed under, and entities often have assets qualifying under different sections. Third, assessed losses (South Africa's term for tax losses carried forward) can be carried forward indefinitely but are subject to an 80% limitation: in any year, only 80% of taxable income before the loss offset can be reduced by assessed losses (effective from years of assessment commencing on or after 1 April 2022). This is similar to the European loss restrictions and must be modelled in the IAS 12.24 recoverability assessment. Fourth, the Section 24C future expenditure allowance creates rolling temporary differences that many preparers find confusing. The allowance is claimed, added back the following year, and reclaimed if the obligation persists. The net effect is a deductible or taxable temporary difference that changes each year based on the movement in the underlying contractual obligation.

Audit expectations

IRBA expects auditors to independently recalculate the deferred tax computation, not simply review management's spreadsheet. The recalculation should start from the IFRS carrying amounts and the tax bases (verified to the entity's IT14 tax return or the latest SARS assessment). IRBA has found that auditors often accept the entity's internal tax provision without corroborating the tax bases, particularly for items where the tax treatment is complex (such as Section 24C allowances for future expenditure, Section 11(j) doubtful debt allowances, and Section 24I foreign exchange gains and losses). IRBA also expects auditors to assess the recoverability of deferred tax assets on assessed losses with reference to the entity's budget, historical accuracy of budgets, and the 80% loss restriction. The assessed loss limitation means recovery takes longer than a simple profit forecast might suggest.

South Africa-specific considerations

South Africa has several tax provisions that create unique temporary differences. Section 24C of the Income Tax Act allows a deduction for future expenditure that the entity is obliged to incur under a contract, even before the expenditure is incurred. This creates a timing mismatch: the tax deduction is claimed when the income is received, but the expense may not be recognised under IFRS until later. The Section 24C allowance is added back to taxable income in the following year and reclaimed, creating a rolling temporary difference. Section 11(j) provides a formulaic doubtful debt allowance (25% of doubtful debts for non-financial institutions, 85.71% for banks and specified financial institutions). This differs from the IFRS 9 ECL provision, creating a temporary difference. For banks, the Section 11(j) allowance is usually lower than the IFRS 9 provision, resulting in a deductible temporary difference and a deferred tax asset on the excess provision. The Broad-Based Black Economic Empowerment (B-BBEE) Act creates incentives and requirements that may have tax implications. Certain B-BBEE contributions qualify for Section 18A deductions, and ownership transactions structured for B-BBEE compliance may create temporary differences on the shares or assets involved. Exchange control regulations and the legacy of the financial rand (abolished in 1995) mean that South African entities with foreign operations must consider whether foreign exchange differences on loans to foreign subsidiaries create temporary differences. IAS 12.41 addresses this: exchange differences on a monetary item that forms part of the reporting entity's net investment in a foreign operation are recognised in OCI, and the deferred tax follows.

Common inspection findings

IRBA found that auditors applied the 27% (previously 28%) rate to all temporary differences, including those on investment properties expected to be sold, where the effective CGT rate of 21.6% should have been used.

Deferred tax on assessed losses was recognised without modelling the 80% utilisation restriction, resulting in an overstated deferred tax asset and an incorrect assessment of the recovery timeline.

Auditors accepted the entity's Section 24C allowance calculation without verifying the underlying contractual obligations or checking whether the allowance had been correctly added back in the following year.

The tax bases of assets were not verified to SARS assessments or IT14 returns, with auditors relying on management's internal computations that contained errors in the wear-and-tear rates applied.

Entities failed to disclose the amount and nature of unrecognised assessed losses, including whether any losses were at risk of restriction under the general anti-avoidance rules.