In case you missed it, on 15th April 2020, the Government published a further round of proposed tax changes to assist those taxpayers negatively affected by the impacts of Covid-19. The latest proposals follow-on from those which were part of the Government’s initial response to the virus outbreak, which have already been legislated for via the enactment of the Covid-19 Response (Taxation and Social Assistance Urgent Measures) Act 2020 on the 25th March 2020.
The latest proposals are:
A temporary loss carry-back scheme (although with a proposal to make it permanent with application from the 2021/22 and later income years) –
In simple terms, if you made a profit in the 2019 income year, but have made (or expect to make once your results are finalised) a loss in the 2020 income year (most likely, but not a requirement it would presently appear, as a result of Covid-19), then you will be able to carry-back that loss to offset against your previous 2019 income year profit, which naturally then will result in a refund of 2019 income taxes already paid.
Equally, if you have made a profit in the 2020 income year but now estimate that you are likely to make a loss in the 2021 income year, then you will be able to apply that estimated loss to your 2020 income year profit. With the final instalment of 2020 provisional tax not due until 7th May 2020 (for standard March balance date taxpayers), the proposed rules will enable taxpayers to now re-estimate the 7th May instalment, which for some could dictate that they have already paid sufficient provisional tax for the 2020 income year, and consequently no final payment is now required. Additionally, to the extent that the 7th May re-estimate reflects an overpayment of your 2020 income tax liability, you will be able to obtain a refund of the excess amount.
Finally, and importantly when your key focus at the moment should be keeping yourselves and your family safe, you do not need to rush to make your 7th May re-estimates prior to that date, as the proposed law change will include a provision to allow you to file your re-estimate post the 7th May.
If you would like to see a worked example of the proposal, refer to page 3 of the Government’s published fact sheet on the proposed changes here – https://www.beehive.govt.nz/sites/default/files/2020-04/15%20April%20SME%20factsheet_0.pdf
If you would like any assistance with calculating your potential 2021 income year result, please do not hesitate to reach out to us.
The loss-carry back temporary mechanisms will be included in a Bill to be introduced to Parliament in the week of 27th April. More permanent rules are likely to be contained in a tax Bill to be introduced in the second half of 2020.
Amendments to the tax loss continuity rules –
Under present legislation, a company is only permitted to retain its tax losses, if at least 49% of the company’s owners who existed at the time when the tax loss was first incurred, remain throughout the whole period of time until the company is able to offset the losses against future profits derived (“the continuity period”). So a change of ownership of more than 51% during this continuity period, results in a complete forfeiture of the tax losses.
The Government is concerned that the negative impacts we expect to see (if not already evident) on businesses over the coming months due to the economic impacts of Covid-19, will have a consequence of companies looking to source additional capital from potential investors in order to survive. The present risk for these companies of course, is any change to their existing shareholder structures of more than 51% due to the new investment of capital, will result in loss forfeiture. To mitigate this potential additional negative impact as a result of the virus outbreak, as well as arguably making a company more attractive to new investors due to the preservation of the tax losses if they were to come on board, the Government proposes to amend the tax loss continuity rules, with application to the 2020/21 and later income years.
While there are no definitive statements at this time as to how the new rules may be designed (public consultation to be undertaken first, with a tax Bill introduced in the second half of 2020), IR’s update page suggests that we may see a similar rule introduced to that presently used in Australia – a “same or similar business” test. In simple terms, the tax losses are unaffected by shareholding changes provided the business of the company continues in the same or similar way it did prior to the ownership change.
Giving IR flexibility to change due dates –
In the Government’s initial response package, we saw a relaxation of the use of money interest “UOMI”) rules, IR able to use its discretion to remit UOMI incurred by a taxpayer with respect to any tax payments due post 14th February 2020, where the taxpayer could show that their ability to make a tax payment on time was significantly adversely affected by the Covid-19 outbreak. This could be both from a physical perspective (they were in quarantine and had no ability to make the payment electronically), or from a financial capability one. The initial response package however made no amendments to IR’s discretion to modify timeframes or procedural requirements for taxpayers who are impacted by Covid-19.
The newly released proposal however, is to introduce a discretionary power into the Tax Administration Act 1994 to allow IR to provide an extension to due dates and timeframes, or to modify procedural requirements set out in the Revenue Acts. This could include, for example, extending deadlines for filing tax returns and paying provisional and terminal tax. At this stage, the power will be time-limited for a period of 18 months and will apply to businesses affected by COVID-19.
Please do not hesitate to reach out to either myself or one of our team if you have any questions surrounding the latest proposals.