COVID-19 (novel coronavirus) – Tax changes to support businesses
Temporary loss carry-back scheme
This temporary change should be introduced in a bill in the week beginning 27 April.
Businesses expecting to make a loss in either the 2019/20 year or the 2020/21 year would be able to estimate the loss and use it to offset profits in the past year. In other words, they could carry the loss back one year.
This change means we could refund some or all the tax already paid for the year they were in profit. It means firms could cash out all or some of their losses in 2019/20 or 2020/21. Without this change, firms would have to carry forward any loss to a year when they make a profit.
Taxpayers do not need to rush to re-estimate their provisional tax before 7 May. Part of the proposed law change would make it possible for them to re-estimate it after the date of the final instalment. This will give them more time to work out any estimated loss for the 2020/21 income year.
Between now and 27 April, officials will consult with tax advisors to ensure the law and administrative guidance is as clear as possible.
While NZ Inland Revenue isn’t able to answer questions before the law passes, they encourage businesses to raise any issues they want to see addressed in the legislation or administrative guidance. You can email those to loss-carry-back-issue@ird.govt.nz
NZ Inland Revenue will not respond to each individual email, but will attempt to answer questions in the published guidance.
Permanent loss carry-back scheme
The Government proposes a permanent loss carry-back scheme, applying to the 2021/22 and later income years.
There will be public consultation about this measure in the second half of 2020.
Changes to the tax loss continuity rules
The Government proposes relaxing the tax loss continuity rules. It intends passing legislation before the end of March 2021, and for it to apply to the 2020/21 and later income years.
Currently, if a company has more than a 51% change in ownership it cannot keep its tax losses.
The introduction of a ‘same or similar business’ test, means a business could carry forward losses. To meet the test, the business must continue in the same or a similar way it did before ownership changed. This test is modelled on Australia’s rules.
Some companies will be looking to raise capital to keep afloat now and to recover in the future. Raising capital may result in a change to the existing shareholder structure. Relaxing the rules will ensure companies in this position could carry losses forward to offset income when they return to profit.
Being able to carry forward losses makes the business more valuable to investors. The rules should improve access to capital for businesses.
NZ Inland Revenue understands that some businesses and investors will want to know now if the proposed changes will apply to them, however they need to take time to work with the tax community to make the law clear. There will be public consultation on the proposed changes in the second half of 2020. It is important the law changes prevent loss trading.
Allowing Inland Revenue to change due dates
The Government proposes giving Inland Revenue discretion to temporarily change dates, timeframes and procedural requirements outlined in a number of Acts administered by them. This provision will apply to businesses and individuals affected by COVID-19.