Tax expert gives an initial assessment of $3,100,000,000 in tax relief: how can business losses generate tax refunds? Does tax continuity no longer depend on shareholdings?

Since the COVID-19 pandemic began affecting New Zealand’s economy, the Government has introduced a series of rescue measures. Today, Finance Minister Grant Robertson proposed further measures, including a new tax loss carry-back scheme estimated at around NZ$3,100,000,000, to provide additional help for small and medium-sized businesses affected by the pandemic. The proposal is expected to go before Parliament in late April. We promptly invited a tax expert to provide a professional assessment.

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The New Zealand Government today announced an additional package to help businesses address the adverse economic effects of COVID-19. It supplements the previously announced wage subsidy scheme, Business Finance Guarantee Scheme and tax changes legislated in late March.

The proposal includes:

• The ability to carry back tax losses;
• Changes to tax loss continuity rules;
• Greater flexibility for taxpayers around statutory tax deadlines;
• Measures supporting commercial tenants and landlords; further business advisory support.

 The tax-related measures are discussed and explained below, although further details will only become available once the formal tax legislation passes through Parliament in late April.

 

Tax loss carry-back scheme

Under existing tax legislation, a business that incurs operating losses—whether a company, a partnership of joint investors, a sole trader or a trust—can carry those losses forward to the next financial year and use them to offset future taxable income. However, a business operating at a loss will usually be urgently seeking fresh funding to keep going. By comparison, the tax benefit of carrying losses forward offers very little immediate value.

Under the new proposal announced today, the Government will allow businesses to carry losses back to the previous financial year. This means that a business suffering a loss in the 2021 financial year could carry that loss back to the 2020 year and receive a refund of tax previously paid.

The Government announced that further details would be included in the proposal to be introduced to Parliament in the final week of April. Businesses with provisional tax due on 7 May, or which have not yet paid terminal tax by the 7 April deadline, will be able to plan ahead to carry anticipated losses back against taxable income for the 2020 financial year before the end of the 2021 financial year. Financial modelling will therefore be crucial to determining the likely size of losses in the 2021 financial year.

 

Company tax loss continuity rules

New Zealand has very strict tax loss continuity rules for companies, requiring at least 49% shareholder continuity from the time losses begin and throughout the loss period. This can be a double-edged sword, as loss-making companies often need capital from outside investors. However, if the required 49% shareholder continuity is not maintained, new capital may mean earlier operating losses are no longer recognised.

The Government has announced that it will relax the tax loss continuity rules. This shows it recognises that companies needing fresh capital require some certainty for these transactions to proceed, including certainty about whether losses accumulated before the capital injection can be retained. The proposed rule and examples in the Government’s factsheet suggest a preference for a ‘same or similar business test’, like that used in Australia. Broadly, if the company’s business after receiving new capital is the same as or similar to its business before new shareholders held more than 51% of the shares, previously accumulated losses could still be carried forward to the next financial year.

It is not yet clear whether the new rules will supplement or replace the existing shareholder continuity requirements. Unfortunately, the details will remain unknown until the formal bill is released.

More flexible deadlines

The Government plans to allow Inland Revenue to exercise discretion in extending deadlines for filing tax forms and paying income tax. This is expected mainly to affect tax return filing dates and provisional and terminal tax payment dates. Its scope will be limited, as it will last only 18 months.

This measure requires careful interpretation. On the one hand, some businesses may no longer need to worry about penalties and interest for late payment. On the other, ‘discretionary extensions’ mean this relief will be conditional and unavailable to some businesses. Inland Revenue has indicated that it wants taxpayers to continue filing returns on time, even if their financial circumstances prevent them from paying the tax due. This allows Inland Revenue to establish how much they actually owe. We therefore recommend proceeding cautiously unless unforeseen circumstances beyond your control prevent compliance.

Reasons to expect further, more detailed fiscal and tax policies

 The Government has indicated that further relief for businesses and households will be announced as it continues assessing the full economic consequences of the current crisis. With less than a month until the Budget is released, we expect the next policy package to be announced alongside Budget 2020.

                    Author

              Mike Rudd

              Baker Tilly

         Staples Rodway 

         Tax Advisory Partner

Mike has more than 20 years’ experience providing professional tax advisory services. He is passionate about helping clients understand the complex tax system and specialises in managing business tax risks, designing domestic and international tax structures, and resolving a range of IRD audit disputes. Mike is also an executive committee member of Property Council New Zealand and has provided tax advice to many prominent property developers and builders in New Zealand and overseas.