The new measures include a tax loss carry-back scheme, introduction of the ‘same business test’ for tax loss carry forward, ability of IR to modify tax timeframes and procedures, and extending the timeframe for cancellation of commercial leases and mortgagees rights to sale or repossession.
A tax loss carry-back scheme
Businesses that are, or anticipate being, in a tax loss for the 2020 or 2021 income year can carry the tax loss back to the prior year to offset the prior year’s tax profit.
This means if a business is in a tax loss for 2020 and was in a tax profit for 2019, the 2020 tax loss can be carried back to offset the 2019 profit, and the applicable 2019 tax paid will be refunded. Similarly, if a business forecasts to make a tax loss for the 2021 income year and made a tax profit in the 2020 income year, the forecast 2021 tax loss can be offset against the 2020 tax profit, and the 2020 tax already repaid can be refunded.
The immediate impact of this change will be felt on 7 May 2020 when the final instalment of 2020 provisional tax is payable. If a business is forecasting a tax loss for 2021, the tax loss can be offset against the 2020 tax profit and may result in no instalment being due on 7 May 2020. The proposal will allow businesses to re-estimate their 2020 provisional tax later in the year, so there is no need to rush to get 2021 forecasts done by 7 May 2020.
This carry back is a temporary mechanism and will be introduced in a tax bill on 27 April 2020. Government is working with tax advisors to ensure the law is clear. The intention is then to make this a permanent change from the 2022 income year. There will be time for public consultation on the permanent change later this year.
At this stage it is not known exactly how the carry back will be actioned, however we expect it will require the prior year tax return to be amended via myIR. Those businesses who paid tax for the 2019 income year and are expecting 2020 to be a loss, will be looking to have their 2020 tax returns filed as soon as possible to access a refund of their 2019 tax.
While this is definitely a huge bonus to some businesses, it will only benefit those businesses who have moved from a profitable tax position to a tax loss position. It does not benefit businesses who have suffered a significant loss in profits, but who still remain in a tax profit, nor does it benefit those businesses who are yet to make profits, such as start-ups.
Businesses can email IR at firstname.lastname@example.org if they wish to raise any issue they want to see addressed in the legislation. While the IR won’t respond directly, they will aim to cover off questions in guidance material.
A question we have submitted is whether the carry-back can be extended to benefit SME companies who clear company profits out via shareholder salaries. If the carry-back will not be extended to shareholder salaries, companies will need to reconsider their level of shareholder salaries for the 2020 income year, balancing this against overdrawn current accounts and the impact on ACC payments if a claim had to be made.
Changes to the tax loss continuity rules
Currently, in order for a company to carry forward tax losses, there needs to be at least 49% continuity of shareholders from the time the losses were incurred until the time the losses are subsequently used to offset tax profits. If shareholder continuity is not maintained, the tax losses are forfeited. This can have a significant impact on a business and is often a hindrance for companies bringing on more shareholders.
The Government has announced an ‘in principle’ change to the continuity rules which will apply from the 2021 income year and is being made to encourage companies to raise capital to help the business through the impacts of Covid-19. This change is the introduction of the ‘same business’ test which means if a company is carrying on a business that will be of a same or similar nature as the business it was carrying on when it made the losses, then the losses can be carried forward, even if shareholder continuity is not maintained.
The detail of the change will be set out in a tax bill later in 2020 and is expected to be in line with Australia’s loss carry forward rules.
Flexibility for tax deadlines
IR will be given greater flexibility to modify procedural requirements or timeframes, such as extension to due dates, to assist businesses over the next 18 months who have been impacted by Covid-19. This flexibility will be modified via an amendment to Tax Administration Act.
Support for commercial tenants and mortgage holders
For tenants, the 10-working day timeframe that commercial landlords currently have before they can cancel a lease will be extended to 30 working days. This will be for both the period the tenant is in arrears before the notice is given, and for the period to remedy the breach.
For landlords and homeowners, the current 20 working day timeframe that lenders have before they can exercise their rights to a mortgagee sale will be extended to 40 working days.
The timeframes for mortgaged goods will be extended from the current 10 working day timeframe to 20 working days.
These extensions are intended to allow more time for breaches or defaults to be remedied.
While promoted as a relief package for SME’s, big business will also benefit from the change to the shareholder continuity rules and the tax loss carry back unless it is intended for thresholds to be put in place. These changes are definitely a win:win for the business community and brings New Zealand in line with the likes of Australia and Canada with regards to the tax loss carry forward and carry back rules and will make New Zealand a more attractive place to do business.
Please contact your Hayes Knight advisor if you would like to discuss any of the above.