Although tax legislation and accounting standards serve distinct purposes and have historically evolved separately, South Africa's tax legislation increasingly reflects the influence of International Financial Reporting Standards (IFRS). Amendments to the Income Tax Act 1962 (the Act) demonstrate growing alignment between tax treatment and accounting principles, as lawmakers increasingly find it efficient to rely on IFRS-based judgments rather than creating separate tax rules, thereby enhancing certainty for taxpayers and SARS.
At the time of publishing this article, certain measures discussed below are contained in the Taxation Laws Amendment Bill, 2025 (B30-2025) (TLAB 2025), which has been approved by Parliament and is awaiting Presidential assent and promulgation. Other measures are new proposals announced in the 2026 Budget Review (2026 Budget Proposals), which have not yet been introduced into a draft bill.
The following examples illustrate key areas where South African tax legislation has aligned with, or deferred to, established accounting principles. Unless otherwise stated, all references to sections are to sections of the Act.
IFRS 10 consolidation test: REITs and controlled foreign companies
Two provisions demonstrate this alignment with IFRS 10 consolidation principles. Section 25BB, which regulates Real Estate Investment Trusts (REITs), provides an illustrative example. A company's classification as a "controlled company" in relation to a REIT rests on whether it is consolidated as a subsidiary under IFRS 10.
Similarly, section 9D, dealing with Controlled Foreign Companies (CFCs), adopts the same IFRS 10 consolidation test to determine whether a foreign entity is “controlled” by a South African resident. Where conditions are met, CFC income is attributed to the South African parent, with calculations drawing on IFRS consolidated financial statements, minimising potential mismatches between financial statements and tax treatments.
Exchange differences linked to accounting classification
Under section 24I(10A), if IFRS classifies a debt as non-current, related exchange differences may be deferred for tax purposes, whereas current items are recognised immediately. The Commissioner retains discretion to prescribe an alternative ruling exchange rate if one has already been used for IFRS financial reporting.
The TLAB 2025 proposes to strengthen this alignment by explicitly referencing IFRS classification of assets and liabilities in subsection (10A), clarifying that exchange differences should not qualify for deferral when loans are written off and no longer reflected in IFRS-compliant financial statements.
Fair value taxation for financial institutions
Section 24JB exemplifies tax-accounting alignment, governing fair value taxation of financial instruments held by “covered persons” – primarily banks and similar institutions. This provision departs from traditional realisation-based taxation by requiring covered persons to include or deduct fair value movements in taxable income as these gains or losses are recognised through profit or loss under IFRS 9.
By deferring to IFRS 9 and IFRS 13's fair value measurement principles, the legislation avoids creating parallel valuation methodologies while ensuring banks' tax positions reflect their financial performance as reported under IFRS.
Building on this framework, the TLAB 2025 proposes to align the tax treatment of dividends from equity investments used to hedge financial liabilities with their IFRS 9 recognition. The amendment excludes from the section 24JB(2)(b) income inclusion “a dividend or foreign dividend in respect of a hedging instrument that is measured at fair value in profit or loss in terms of IFRS 9”, mitigating existing tax mismatches arising where such dividends are already recognised through profit or loss for accounting purposes.
Doubtful debt allowance and IFRS 9
Section 11(j) allows taxpayers to claim deductions for doubtful debt allowances based on a percentage of impairment allowances recognised under IFRS 9's Expected Credit Loss (ECL) model, directly linking tax-deductible provisions to accounting standards. Legislators have recognised that IFRS 9’s ECL model offers a reliable basis for estimating doubtful debts.
This coupling spares companies from maintaining divergent methodologies and makes tax deductions more reflective of genuine economic losses.
CFC currency adjustments and insurance contracts
Recent legislative reforms further align tax treatment with international accounting standards.
Section 9D(2A)(k) permits certain multinational groups to translate CFC net income using their functional currency, aligning with IFRS principles by recognising the economic reality of hyperinflationary environments. The 2026 Budget Proposals address an anomaly in the interaction between section 9D(6) and section 25D(5): where the South African shareholder is a Domestic Treasury Management Company (DTMC) with a functional currency other than rands, the interplay of these provisions may create onerous translation requirements resulting in distortions in taxable income. The proposed amendment would provide that where a DTMC is the resident shareholder of a CFC, section 9D(6) does not require translation of net income to rands, a further step towards aligning tax mechanics with IFRS-based functional currency principles.
Amendments to section 28 reflect the adoption of IFRS 17, mandatory for annual reporting periods beginning on or after 1 January 2023. IFRS 17 reshaped how insurers recognise liabilities and revenue and the legislative changes ensure that insurers' tax treatments align with this standard. However, section 28(3B)(a) was inadvertently omitted from the 2024 consequential amendments and continues to refer to outdated terminology. The 2026 Budget Proposals include a correction to section 28(3B)(a) to align the deduction with amounts deducted under subsections (3) and (3A) and included under subsection (4), ensuring that the tax treatment of insurance liabilities transferred between short-term insurers is fully aligned with IFRS 17.
Section 29A, dealing with the taxation of long-term insurers, was substantially amended by earlier legislation to integrate the IFRS 17 framework, particularly in relation to fulfilment cash flows and the building-block approach. The TLAB 2025 makes a further technical clarification to the ordering of deductions within section 29A.
Hybrid equity instruments
The TLAB 2025 initially proposed the most significant advancement in IFRS-tax alignment through amendments to section 8E. The proposed redefinition of “hybrid equity instrument” would have included “any share or financial instrument that is or would be classified as a financial liability in the annual financial statements of the issuer, in accordance with IFRS”. This represented a direct incorporation of IFRS classification principles into tax law, leveraging the substance-over-form analysis of IAS 32 and IFRS 9.
However, following extensive stakeholder concerns that the broad wording would effectively eliminate preference shares as a viable financing mechanism, this proposal was retracted on 3 September 2025, demonstrating the delicate balance required when aligning tax and accounting frameworks.
The global minimum tax: IFRS as the computational foundation
The OECD's Global Anti-Base Erosion (GloBE) Model Rules, enacted through the Global Minimum Tax Act (Act 46 of 2024), which applies to fiscal years beginning on or after 1 January 2024, are the most ambitious use of IFRS as the computational foundation for a tax regime. IFRS financial accounting income is the starting point for computing GloBE income, with multinationals subject to a 15% effective minimum tax rate on constituent entity income in low-tax jurisdictions. The interaction between this starting point and domestic provisions – particularly deferred tax assets and covered taxes under IAS 12 – creates new complexity. This is a qualitative step change: the GloBE rules embed IFRS financial statements as the engine of the tax calculation.
Observations on the value of alignment
South African lawmakers have demonstrated that aligning tax legislation with international accounting standards is both practical and beneficial. Across REITs, CFCs, exchange differences, doubtful debts, insurance liabilities and the global minimum tax, the approach is consistent: where robust, internationally recognised accounting principles exist, tax legislation can efficiently adopt them rather than creating parallel rules.
The TLAB 2025 and the 2026 Budget Proposals represent the most ambitious attempts yet at comprehensive IFRS-tax alignment, spanning financial instrument classification, hedge accounting, foreign exchange deferral, functional currency mechanics and insurance contract terminology. While the hybrid equity instrument proposal was retracted, the remaining amendments demonstrate South Africa's commitment to leveraging international accounting standards as a foundation for tax policy.
Navigating this evolving landscape requires professionals who understand the intersection of business, tax and legal requirements. The Webber Wentzel tax team is well positioned to assist clients in navigating this space and ensuring compliance with both tax and accounting developments.
