Richard has had over 30 years’ experience with New Zealand and International taxation. His team provide services including:
- Q&A service for accountants
- Tax opinions
- IRD risk reviews and audits
- IRD arrears
- International tax advice
Below are articles from Richard’s weekly email ‘A Week in Review’ over the last month. You can sign up for his ‘A Week in Review’ newsletter here and get the updates weekly, directly to your inbox.
- Deductions for Covid-19 disrupted businesses, 27 April
- R&D tax credit Covid-19 variations, 27 April
- Meal expenses… Deductible?, 3 May
- Deemed dividends interpretation statement, 3 May
- Special report on new legislation re-released, 10 May
- COV 21/02 released, 10 May
- Cryptoassets QWBA’s released for consultation, 10 May
- Leased apartments & GST, 17 May
- Reporting PIE income for 2021, 17 May
- Coupla QB’s finalised, 17 May
- Annual CPI adjustments released, 17 May
- ESS employer deductions – were you confused?, 24 May
- ‘Continuity of business activities’ interpretation statement, 24 May
- Budget 2021 highlights?? 24 May
Deductions for Covid-19 disrupted businesses
IR has released a draft interpretation statement on income tax and GST deductions for businesses whose operations have been disrupted by the Covid-19 pandemic.
Referenced PUB00393, the commentary explores whether, in the Commissioner’s eyes, taxpayers whose businesses have either downscaled or ceased to operate, can continue to claim income tax and GST deductions in relation to expenditure incurred post the happening of one of those events.
The draft view presented is that an income tax deduction will usually be allowed where a business has downscaled or ceased operating temporarily, however not where a business has completely ceased, even if it is possible that the business may restart later.
The potential grey line therefore, will be determining whether a cessation is considered ‘ ‘temporary’, or whether a downscaling has been to such a degree that it is actually indicative of a cessation – naturally each case will be fact specific in that regard. Additionally it will be important to be able to establish when a business has ceased (not temporarily), as any expenditure incurred post this point in time is unlikely to be deductible.
A potential fishhook can also arise where the business completely changes direction due to the impacts of Covid-19, as costs incurred that are preliminary to or preparatory to the start of a new business will often not be deductible due to the capital limitation.
The income tax focus of PUB00393 is on the words ‘carried on’ in a business context, which references naturally to the leading New Zealand case decision on the issue, of Grieve v CIR (1984). From the principles outlined in Grieve’s, two are then given some focus in the commentary, being the ‘intention to make a profit’ and the ‘nature of the activities being carried on’.
The Commissioner acknowledges that it may not always be clear at the time of actual certain events whether a business has ceased, however that by the time the relevant income tax returns are due for filing, there may be greater clarity in this regard – to the extent that deductions can be apportioned accordingly.
From a GST perspective, the issue becomes whether the registered person has ceased their taxable activity, which is a different test to that undertaken for determining the ‘carrying on of a business’. The focus now will be on whether the person’s activities satisfy either the ‘continuous’ or ‘regular’ elements of the taxable activity definition contained within section 6. Consideration will also need to be given to any specific Covid-19 relief variations e.g. COV 20/09 (short-term accommodation
converted to long-term for expected periods of less than 18 months), or the more specific statutory reference in section 52(3) that IR should not cease a person’s registration if it is expected that any further taxable activity will be carried on within the next 12 months.
In a GST context, if the taxable activity is deemed to have ceased, certain expenditure incurred in connection with the ending of the taxable activity should still be deductible. Additionally, a deregistration adjustment will be triggered in relation to the market value of any assets of the taxable activity retained by the taxpayer at the date of cessation.
Finally, the draft interpretation contains eight useful examples, which set out IR’s views on the income tax and GST consequences arising for the taxpayer for each fact specific event.
Should you wish to have your say on PUB00393, the deadline for comment is 28th May 2021.
R&D tax credit Covid-19 variations
IR has released COV 21/01 – variation to sections 33E and 68CC(3) of the Tax Administration Act 1994 (TAA), which has an effective date of 21st April 2021 to 30th September 2021.
The variation relates to the filing of both a ‘criteria and methodologies notice’ in relation to the R&D tax credit for the 2020-2021 income tax year under section 68CC(3) of the TAA (usually due 7th May 2021), and the filing of a supplementary return for the 2019-2020 tax year under s 33E of the TAA (usually due 30th April 2021).
For a ‘criteria and methodologies notice’, the due date is extended to the 7th day of the fifth month after the end of the income year for a person with a standard or late balance date, or 7 August 2021 for a person with an early balance date, but in no case beyond 30 September 2021.
For a supplementary return for the 2019-2020 tax year, the date by which a supplementary return must be filed is amended to be the day that is 90 days after:
(a) the due date on which they are required to file a return of income for the tax year under section 37; or,
(b) the due date on which they would be required to file a return under section 37 if they had assessable income.
Note that the variation should only be applied by those whose ability to otherwise file on time, has been materially delayed or disrupted by the Covid-19 outbreak and its effects (so be ready for potential push-back from IR in this respect).
Meal expenses… Deductible?
IR has issued a draft interpretation statement reflecting the Commissioner’s views on the GST and income tax treatment of meal expenses for the self-employed.
Titled PUB00361, the 38-page document commences with a discussion on the ‘general permission’ (which would need to be satisfied in the first instance to support a deduction claim), and its relationship with the ‘private limitation’ – which like the schoolyard bully, takes the deduction entitlement away, just when you thought you had one!
This initial commentary covers the first 15 pages of the IS, and goes into some detail to reflect the various case law decisions on the topic, the final conclusion being that in general, meal expenses incurred by a self-employed person are non-deductible because they are of a private or domestic nature. The only exception for which there is convincing authority (also known as, case law) is where the income earning process of the taxpayer requires extra meal expenses in which case that extra element will be deductible.
I would suggest that a read of PUB00361 is useful regardless of whether or not meal expense deductibility is at the top of your “I’m not so sure” list, as it provides some insight on the Commissioner’s likely response to many a client’s initial statements, that the gym membership or day-care costs must be tax deductible because it was a necessary cost to enable them to derive their income (thereby satisfying the ‘general permission’) – that the expenditure is still of a private or domestic nature, and consequently deductibility is denied by the private limitation.
In this regard, the IS states that an outgoing is of a private or domestic nature if it is “exclusively referable to living as an individual member of society and domestic expenses are those relating to the household or family unit”. Now this statement itself is not overly helpful in responding to your client’s pleads in relation to their ‘gym’ or ‘day-care’ deduction desires, however the following extract from the C of IR v Haenga (1985) decision may help to explain the position more clearly – “If sec 105(2) and cl 8 stood unqualified, they could permit deduction of expenditure on matters such as food, clothing, medical expenses, travel, and shelter. All, in a broad sense, would be incurred in gaining assessable income, or for the purposes of employment. One does not gain assessable income, or hold employment if starving to death, or dying from disease or exposure. On a sine qua non approach, the logic would be unanswerable…
The policy solution is prohibition of so-called personal or domestic expenditure. To say food, clothing, or shelter or the like is an essential requirement for the purposes of gaining an income might remain logical, but it is not generally to be legal. A line is to be drawn, placing beyond the pale that which ‘properly’ is expenditure of a personal or domestic nature. No statutory definition is given. Obviously, there will be borderline cases involving line drawing. The Courts are expected to do so in a manner which promotes this statutory object.”
While the focus of PUB00361 is on the self-employed, IR also considered it necessary to insert some commentary into the document, as to why a self-employed persons meal expenses may be non-deductible, yet in the same scenario had they operated via a company and been an employee of the company, or as a self-employed person they were paying for employee meals, the expenditure would be deductible – a difference in treatment which was once summed up by Judge Moore’s comment – “a degree of commercial unreality which is approaching the comic”. I’ll leave it to you to read the IR’s commentary and form your own views as to whether the difference in treatment makes sense.
The income tax discussion in the IS concludes with a brief commentary on the entertainment expenditure rules contained within subpart DD of the Act.
Three pages are then dedicated to the GST aspects of the meal expense deduction issue, but in essence, the income tax treatment will usually dictate the GST input tax claim position, and the final seven pages of PUB00361 contain examples to illustrate IR’s views.
Should you wish to have your say on the draft document, you should do so no later than 27th May 2021.
Deemed dividends interpretation statement
Slightly shorter than our previously discussed document at 22 pages, is IR’s draft IS titled PUB00362, covering the topic of deemed dividends. However, I would also suggest that it is a shorter document, because it certainly lacks the detail that PUB00361 contained, and you may come away from reading it with the feeling that you have been short changed with many of your questions perhaps still unanswered, so be warned in that regard (although arguably all you need is to understand the potential ‘trigger’ and you can then go in search of the detail when the alarm goes off in your head).
Hopefully most of you will be aware of the deemed dividend concept and when to be ‘on guard’ so the potential negative outcome for your client (non-deductible to the company/assessable income to the shareholder) will not be overlooked.
So three basic questions to ask yourself:
- Is there a transfer of value from the company to the shareholder (or an associated person of the shareholder)? Now this transfer can be either money or money’s worth.
- If yes, then did that transfer occur because of the shareholding relationship? In other words, would the company have done the same thing (provide an interest free loan for example) with a non-associated person.
- If yes, is there any legislative exclusion that will negate an otherwise deemed dividend conclusion? (note that the IS is not a one stop shop here, as it does not cover all exclusions)
PUB00362 commences with this ‘transfer of value’ discussion and includes five examples to illustrate the concept, with a subsequent three examples to then explain the ‘caused by a shareholding’ element.
Once you have concluded that a deemed dividend does exist, then its suggested that the general rule for calculating the dividend amount is relatively easy – just take the value from the company and minus from that amount the value provided to the company in return by the person. The dividend is then usually deemed to have been paid on the date the transfer of value takes place.
Where the company is making property available to a person, the calculation rules and deemed timing of the dividend payment are slightly different however. Fringe benefit values are usually used to calculate the dividend amount on a quarterly basis, and a single dividend is deemed to have been paid on a date six months post the end of the company’s income year.
The draft IS also confirms that where the person is both an employee of the company and a shareholder, and has received an unclassified benefit (for FBT purposes), then the company can elect whether a dividend or fringe benefit has arisen.
Once again if you want to have your say, make sure you do so also no later than 27th May 2021.
Special report on new legislation re-released
Early in April, ‘A Week in Review’ covered the release by IR of a special report on the new legislation stemming from the passing of the Taxation (Annual Rates for 2020–21, Feasibility Expenditure, and Remedial Matters) Act 2021.
Within a few days of its release however, IR acknowledged the report contained a number of errors, and advised a corrected version would be out soon. Well, after many sleepless nights (hmmm), the wait is over and the new 107-page version (previously 105 pages) is now available.
For those of you who missed my previous update, coverage in the report includes amongst other things (slightly amended):
- Extending the bright-line test period from five to ten years – in this regard, note that when considering whether the five- or ten-year period now applies to you, firstly determine when you acquired your first interest in the residential land (entered into binding agreement) – was this date pre (five years) or post (ten years) 27th March 2021. Once you have determined which rule you are subject to, then your general rule for calculating the applicable bright-line period is date of title transfer through to date you enter into binding agreement to sell. Also note the change to the main home exclusion rule for land acquired post 27th March 2021 (existing rule still applies to land subject to five year bright-line period), and the clarification that short-stay accommodation (not provided in the owners main home) is subject to both bright-line (previously arguable ‘business premises exclusion’ may have applied) and residential rental deduction ring fencing rules.
- Feasibility expenditure – now potentially deductible over a five-year spreading period, where the expenditure related to completing, creating or acquiring property (business assets) that is later unsuccessful or abandoned. Immediate deductions are also available for such expenditure that in total is $10,000 or less in an income year. Together, the changes are intended to set out the circumstances when expenditure can be deducted for property that but for abandonment would have been depreciable property or revenue account property. Note the word of caution that the general permission must still be satisfied so pre-business commencement expenditure or that relating to a new business which does not have sufficient nexus to the existing business, is likely to remain non-deductible.
- Purchase price allocation rules – requiring parties to a sale of business assets (post 1st July 2021 agreements entered into) with different tax treatments to adopt the same allocation of the total purchase price to the various classes of assets for tax purposes.
- Amendment to definition of eligible R&D expenditure – to clarify that expenditure must be closely connected with conducting an R&D activity to be eligible for the R&D tax credit. To ensure that expenditure claimed has sufficient nexus with the eligible R&D being conducted, the amendment clarifies that expenditure is only eligible if it is directly related to, required for, and integral to the R&D taking place; and
- A slight amendment to the temporary loss carry-back rules, in relation to group companies (66% common ownership). The prior rules required the company in the group to have a net loss in either the 2020- or 2021-income year, and to have taxable income in the income year immediately preceding the loss year. This meant that a company having losses in both the profit and loss years could not utilise the rules, even if other group member companies had taxable income in the profit year against which the losses could be offset. This drafting was contrary to policy intent and has been amended to permit the loss offsets with other group members to proceed.
Now you may recall that my previous editions, AWIR comments on the bright-line changes alluded to no mention of the ‘new build’ carve-out, which was mentioned in IR’s fact sheet published in March 2021 – new builds acquired post 27th March 2021 were supposed to remain subject to the five year bright-line period. I had assumed therefore (incorrectly dare I say) that the updated version would have included such reference, however just like my kids on Christmas when Santa hasn’t left ‘exactly’ everything that they asked for, I am too left feeling disappointed by the latest release!
COV 21/02 released
If you do not have clients who form imputation groups to allow a company with a debit ICA balance to use the credits of a related company to reduce the debit balance, then read no further.
IR has released COV 21/02, ‘Variation to section FN 7(5) of the Income Tax Act 2007’.
Section FN 7(5) basically sets the effective date of any notice provided to IR under the legislative provision, being the start of the tax year in which the Commissioner receives the notice.
COV 21/02 permits a notice given during the period 28th April 2021 to 30th September 2021 to still apply from the start of the tax year ending 31st March 2020. The variation is to recognise that some customers who did not take steps to address a debit balance in their imputation credit account before 31 March 2020 could have used a tax pool or other option to reduce the balance subsequently but the impact of Covid on their profits has been such that these options will adversely affect their cashflow.
Cryptoassets QWBA’s released for consultation
Finally, saving the best for last, because I know how you all love trying to get your heads around the income tax issues associated with cryptoasset transactions (I have one client who consistently requests 7.30am discussions on the topic!), IR has released 2 draft QWBA’s (although both with the same reference number) for review and comment.
Number one PUB00405’s focus is on the income tax treatment of cryptoassets received from an airdrop – a 12-page document which comments on both the initial receipt of airdropped cryptoassets, and the subsequent disposal of the same.
With respect to the former, the receipt is likely to be taxable where either the person has a cryptoasset business, they acquired the cryptoassets as part of a profit-making undertaking or scheme, they provided services to receive the airdrop (and the cryptoassets are payment for the services provided), or they receive airdrops on a regular basis, and the receipt has hallmarks of income. If your client does not tick any of these boxes, then likely that the receipt is not taxable.
Turning next to the subsequent disposal of the airdropped cryptoasset, likely to be taxable where the person has a cryptoasset business, where they disposed of the cryptoassets as part of a profit-making undertaking or scheme, where they provided services to receive the airdrop, or where they acquired the cryptoassets for the purpose of disposing of them.
Number two PUB00405 then looks at the income tax treatment of cryptoassets received from a hard fork – a 13-page document this time, which again considers both the initial receipt and the subsequent disposal.
The conclusions reached are similar in vein to those for airdropped cryptoassets.
The receipt of cryptoassets from a hard fork is taxable where a person either has a cryptoasset business or they acquired the cryptoassets as part of a profit-making undertaking or scheme. In other cases, the receipt is not taxable.
The subsequent disposal of cryptoassets that were received from a hard fork is taxable where a person has a cryptoasset business, where they disposed of the cryptoassets as part of a profit-making undertaking or scheme, where they acquired the cryptoassets for the purpose of disposing of them, or where they acquired the original cryptoassets for the purpose of disposing of them (where the person receives the new cryptoassets through an exchange). IR expects in most cases that the disposal will be taxable.
25th May 2021 is the due date for any feedback for both QWBA’s.
Leased apartments & GST
IR has published a new leaflet on its website for download, titled “Thinking of selling your leased apartment?” (IR498). The document is to highlight to the unsuspecting (a number of whom I have bumped into over the years unfortunately), the potential GST exposures in relation to an apartment they may have acquired with a managed lease in place, which had the consequence that they did not have to pay any GST to the vendor (usually a developer) upon purchase – what a bonus!
What the poor unsuspecting investor did not appreciate however, was that the vendor was simply passing on their GST obligations with respect to the apartment sale, to the purchaser. The investor was now effectively locked into the managed lease scenario, and they were potentially exposed to having a rather large tax bill due to IR, which could be triggered by the happening of a number of events:
- If the investor wanted to terminate the management lease and live in the apartment themselves;
- If the investor wanted to take over the management of the apartment themselves and lease the apartment to longer term tenants (short-stay accommodation would usually be deemed the making of taxable supplies and therefore not trigger any change of use/cessation adjustment);
- If the management company lease expires (or more likely the management company itself expires) and the investor has not entered into a new lease at the time of sale; or,
- If the investor can’t find a purchaser willing to register for GST and/or take over the management lease.
Where the apartment leasing is the only GST taxable activity being carried on by the investor (a common scenario), the first two triggers would often have the consequence that the investor was required to de-register for GST, resulting in a GST output tax amount equivalent to 3/23rds of the apartments market value now being payable to IR. Problem is (and a rather serious one to have I would suggest) that there is no disposal of the asset to provide the necessary funds to pay the GST output tax – so the investor has to find the necessary cash elsewhere (and we are not talking loose change here).
So, if you or your clients are looking to buy an apartment, and the sales pitch by your friendly real estate agent is that you can save 15% by simply being GST registered and signing a simple management lease (which will provide you with a ‘guaranteed’ income stream), then remember the age-old phrase of ‘buyer beware’ – paying an extra 15% upfront may in fact be the cheaper option.
Reporting PIE income for 2021
A reminder from IR that from the 2021 income tax year, Portfolio Investment Entity (PIE) income must be included in all IR3 individual income tax returns.
Returns filed in myIR or the Return service in software will not contain all the PIE information until after IR has received the PIE reconciliation files due on 17th May 2021. It is recommended therefore, that unless you are confident that your client is not a KiwiSaver member and does not have any other PIE income, you should wait to file IR3 returns until post the 17th.
Coupla QB’s finalised
Previous AWIR editions have highlighted the release by IR for public consultation of draft Questions We’ve Been Asked on the topics of “Whether ‘negative interest’ payments are subject to withholding taxes” and “Charities business exemption – business carried on in partnership”.
These two documents have now been finalised.
- QB 21/02 is the reference for – “Whether ‘negative interest’ payments are subject to withholding taxes.” It is an eight page document (so just long enough to read during your pre-bedtime cuppa and biscuits) with the basic conclusion that there are no withholding tax deduction requirements because ‘negative interest’ cannot be said to be a payment made for money lent – it’s not a payment from the borrower to the lender.
- QB 21/03 is the reference for – “Charities business exemption – business carried on in partnership”. It’s shorter at five pages (so perhaps for the cuppa without the accompanying biscuits) and explores the question of whether income derived by a charitable entity from a business can be exempt under section CW 42 if the business is carried on by a charitable entity in partnership with a non-charitable entity? IR’s conclusion is yes, the income can be exempt if other requirements (such as the control (you can’t take the money for yourself and run) and territorial restrictions (charitable purposes carried on in NZ) are satisfied.
Annual CPI adjustments released
IR has released a number of CPI adjustments which have application to the March 2021 income year:
- CPI adjustment for household boarding service providers – updates DET 19/01, “Standard-cost household service for private boarding service providers” shows the annual adjustment for the weekly standard-cost for each boarder as $194.00.
- CPI adjustment for short-stay accommodation – updates DET 19/02, “Standard-cost household service for short-stay accommodation providers” shows the annual adjustment to the standard-cost household service for short-stay accommodation to a daily standard-cost for each guest for an owned dwelling of $52.00, and to a daily standard-cost for each guest for a rented dwelling of $47.00.
- CPI adjustment for childcare providers – updates DET 09/02, “Standard-cost household service for childcare providers” shows the annual adjustment to the standard-cost household service for childcare providers to an hourly standard cost of $3.75 per hour per child, and to an annual fixed administration and record-keeping fixed standard-cost component of $367 pa for a full 52 weeks of childcare services provided.
ESS employer deductions – were you confused?
Just in case you were a little confused, IR has issued QB 21/04 to provide an answer to the question – When an employer is party to an employee share scheme, when does an employer’s expenditure or loss under section DV 27(6) or income under section DV 27(9) arise?
The potential for confusion has arisen, due to the existence of two relevant dates for both the employer and the employee, when the employee is deemed to have derived a benefit under an employee share scheme, which triggers now (since 29th September 2018) what is referred to as the “share scheme taxing date”. This date is defined as the earlier of:
- The first date when the shares are held by or for the benefit of an ESS employee (or associate) and, after which, under the provisions of the ESS, there is:
- no material risk that beneficial ownership may change or that a right or requirement in relation to the transfer or cancellation of the shares may operate;
- no benefit accruing to the ESS employee (or associate) in relation to a fall in value of the shares; and
- no material risk that there will be a change in the terms of the shares affecting the value of the shares.
- The date when the shares or related rights of an ESS employee (or associate) are cancelled or are transferred to a person who is not associated with an ESS employee.
The new regime was introduced to ensure neutral tax treatment of ESS benefits as compared with other forms of employee remuneration. That is, to the extent possible, the tax position of both the employer and the employee should be the same whether remuneration for labour is paid in cash or shares. Consequently, on the share scheme taxing date, usually an amount of income (although it can be expenditure if the share value has decreased) is calculated for the employee, and an equivalent deduction amount arises for the employer.
‘Income recognition’ and ‘expenditure incurred’ principles then come into play, because for the employee, if the employer has an employee benefit reporting obligation (most likely), then the applicable date for income derivation purposes for the employee, is 20 days post the share scheme taxing date – known as the ESS deferral date.
From an expenditure incurred perspective therefore, confusion surrounded whether the deduction entitlement arose on the share scheme taxing date (because arguably the benefit was calculated on this date, so the ‘cost obligation’ was then known by the employer) or on the later ESS deferral date.
Now clearly you are going to be saying to yourself, that the issue really only has relevance should the share scheme taxing date fall within 19 days of the end of an income year, because only then is there the potential for the deduction not to be claimable by the employer in the same income year that the share scheme taxing date falls, if the deduction entitlement does not arise for the employer until the ESS deferral date – and you’d be right!
However, for the sake of clarity (and because Murphy’s law will dictate that as soon as I dismiss the issue as being somewhat immaterial, a client will have a material issue!), QB 21/04 determines that the employers deduction entitlement arises on the ESS deferral date – because it is only via application of section DV 27 that the employer’s obligation for the expenditure or loss under the ESS is created, and this obligation is deferred to a date 20 days post the share scheme taxing date where the employer has an employee benefit reporting obligation.
Finally, just to avoid any confusion, if there is no employee benefit reporting obligation (most likely where the person is a former employee when the ESS benefit is deemed to arise), then the employer’s deduction entitlement will be triggered on the share scheme taxing date.
‘Continuity of business activities’ interpretation statement
One positive which arose as a consequence of the Covid pandemic, was the amendment to the loss carry-forward rules for companies, to introduce a ‘business continuity’ test – an effective safe-haven for a company that needed to restructure its shareholding ownership by more than 51% (perhaps to source new capital to help it survive the pandemic), but in essence carried on the same business activities post the change. Historically, the failure of the company to maintain a 49% shareholder continuity test from the income year in which tax losses arose through until the income year in which those losses were utilised, resulted in a complete forfeiture of the losses.
Effective from the commencement of the 2020/21 income year, a company that fails to satisfy the ownership continuity requirements, may still be able to carry forward unused tax losses under a new test in subpart IB (the business continuity test).
The legislation to introduce the new test (effective for most from 1st April 2020) was only passed just prior to the end of the income year to which it was to first apply. With March 2021 income tax return preparation already underway, IR has now released draft interpretation statement PUB00376 – Loss carry-forward – continuity of business activities. The prime focus of the IS is to explain in what circumstances a company is likely to satisfy the business continuity test.
Importantly, while a company needs to show that it has satisfied the business continuity test, it must also continue to do so for what will be referred to as the ‘business continuity period’, which is defined in the document as typically the period starting immediately before the ownership continuity breach and ending on the earlier of:
- the last day of the income year in which the tax loss component in question is used; and,
- the last day of the income year in which the fifth anniversary of the ownership continuity breach falls.
However, broadly, for a company where 50% or more of its tax losses eligible for carry-forward arose from bad debt deductions. The business continuity period will end on the last day of the income year in which the tax loss component in question is used. In other words, the five-year cap on the test will not apply.
So, some take-aways from the draft IS for you:
- ‘Business activities’ are any action taken in pursuit of one or more businesses that may be carried on by the company for income tax purposes. ‘Nature’ is defined as the ‘basic or inherent features, qualities, or character of a person or thing’, so the test is concerned with the basic or inherent features, qualities, or character of the company’s business activities.
- The nature of a company’s business activities should be described by referring to the type (or category) of product or service that the company produces or provides, and not to particular products or services.
- Determining whether there has been a major change in the nature of a company’s business activities requires both a qualitative and a quantitative assessment, taking into account changes in assets and any other potentially relevant factors.
- If there has been a major change in the business activities carried on by a company, the business continuity test may still be satisfied if the major change is a permitted major change (s IB 3(5)). There are four permitted major changes, broadly, changes:
-made to increase the efficiency of a business activity;
-made to keep up to date with advances in technology;
-caused by an increase in the scale of a business activity; and,
-caused by a change in the type of products or services produced or provided
- A tax loss cannot be carried forward if before the beginning of the business continuity period the business activities carried on by the company have ceased and have not been revived, or if the company ceases to carry on business activities during the business continuity period. In this regard, a temporary cessation will not constitute a cessation of business activities. In contrast, cessation with the possibility of recommencement will constitute a cessation.
Note that only those tax losses incurred in 2013/14 and later income years will be eligible for carry-forward under the business continuity test.
Finally, if you can’t see yourself wading through 42 pages of analysis on the issue, just cheat and go straight to the Flow Chart on page 35 and see if that helps to answer your question.
Feedback on PUB00376 is requested no later than 28th June 2021.
Budget 2021 highlights??
Well for those of us in the tax world, Budget 2021 was effectively a non-event, particularly post the March 2021 circus and associated hype of the Government’s property tax related announcements. A part of me was thinking that there may have been more to come in Budget 2021, considering that while the Powers-That-Be were seemingly unfazed by the panic they created for your typical mum and dad property investors in relation to the proposed new interest deduction limitation rules, there had been nothing further to date in the form of a consultancy document to perhaps help alleviate some of those concerns, by explaining some of the terminology used in the March announcements.
However clearly not so, and therefore one continues to wait with eager anticipation for the chance to have ones say on the proposals, although equally with some concern that time is fast running out if the Government actually wants to run a legitimate consultation progress, considering they want the legislation in place to take effect from October 1st.
The single “tax related” action that did stem from Budget 2021, which was introduced into Parliament under urgency on 20 May 2021, passing through all stages by the following day and now awaiting the Royal assent, was the announced increases to the Minimum Family Tax Credit threshold from $30,576 to $31,096 on 1 July 2021 – a tax credit aimed at providing financial support to low-income working families not receiving a main benefit.
Oh well, there’s always Budget 2022 to look forward to!
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