Keeping up with the constant changes in tax law, especially during COVID-19, can be a full-time job and not for the faint-hearted. You can spend a lot of time online searching for the latest relevant information and still not be clear on what it means. There has been a lot of information about the COVID-19 Business Support Package released last week, and in particular how the loss carry-back mechanism works.
To save you time and make it easier to understand how it affects you, we have broken it down to small easy to digest bite-size pieces as follows:
What the current tax changes mean for your business
Here is the short answer.
- You actually need to make a loss over the whole financial year between 1 April 2020 and 31 March 2021 to be able to offset against prior years taxable income to receive a tax refund
- If you don’t make a loss there no doubt will be penalties and interest applied against you
- More importantly, if you make a loss you only receive a maximum of 33% of that back as a tax refund
- For a refund to be of any decent size you have much bigger problems to worry about than a tax offset
- $3.1b tax loss carry-back scheme (estimated cost over the next two years). This is a loss carry-back mechanism which basically means you can forecast a loss in the current financial year and offset that loss against the profit from a prior year which will result in a tax refund.
I don’t think many businesses will actually make a loss over the total financial year, but time will tell.
- $60m estimated annual savings to business each year from changes to the tax loss continuity rules
I think this means that you can have a change of shareholding (maybe a new investor) in your company and you don’t lose your losses from the current year or a prior year.
- $25 million in the next 12 months for further business consultancy support
- Greater flexibility for affected businesses to meet their tax obligations – no real guidance released yet
- Extension of notice required to cancel leases and reposess commercial properties
Here is the update in full from Wolters Kulwer.
The Government has announced a suite of new measures to provide relief for businesses during the COVID-19 pandemic. Chief among the action points announced is a tax loss carry-back scheme. A tax bill will be introduced later this month (April) to enable this.
Other measures revealed include:
- changes to the tax loss continuity rules;
- greater flexibility for taxpayers in respect of statutory tax deadlines;
- measures to support commercial tenants and landlords; and
- further business consultancy support.
Tax loss carry-back scheme
A loss carry-back mechanism enables a business entity to offset a loss in a particular tax year against a profit in a previous year, resulting in a refund of the tax paid in the previous profitable year. This gives cash to businesses that are, or anticipate, being in loss. A temporary mechanism will be included in a tax bill to be introduced 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.
The permanent version of the scheme will be included in a later tax bill after public consultation has been carried out.
Inland Revenue’s website notes that 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 the end of April, Inland Revenue will be undertaking targeted consultation with tax advisors to make the law and administrative guidance as clear as possible. It is estimated that this scheme could lead to refunds and reduced tax bills of $1.2 billion in 2019-20 and $1.9 billion in 2020-21.
Loosening of the tax loss continuity rules
The tax loss continuity rules will be relaxed with the expectation that this will lead to an increase in physical/financial capital. The detail of the changes will be included in a tax bill introduced in the second half of 2020. The new rules will apply for the 2020-21 and later income years and will be modelled on the Australian rules with the introduction of a ‘same or similar business’ test, meaning the business must continue in the same or a similar way it did before ownership changed.
The Tax Working Group’s 2018 report had previously recommended a relaxation of the loss continuity rules, but noted it is a complex area with significant risk revenue risk for the Government (estimated to result in $60 million of foregone government revenue per year).
Greater flexibility for taxpayers in respect of statutory tax deadlines
Inland Revenue will be given greater discretionary power 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.
Amendments to the Tax Administration Act 1994 are expected to be included in the tax bill to be introduced at the end of April.
Measures to support commercial tenants and landlords
The Government is extending the current timeframe that commercial landlords can cancel a lease to from 10 to 30 working days. This is for both (i) the period the tenant is in arrears before the notice is given, and (ii) the period required to remedy the breach before the landlord can cancel the lease and the mortgagee can exercise their rights to sale or repossession. The changes allow for more time for breaches or defaults to be remedied.
The Government is also extending the timeframes for lenders from 20 to 40 working days for mortgaged land, and from 10 to 20 working days for mortgaged goods. This will apply to commercial mortgages and home loans.
Legislation on these changes will be introduced on April 27 and will apply retrospectively once the bill is passed.
Free business consultancy support
Businesses will be able to access free, specialist support for a range of issues they may be currently facing, including business continuity planning, finance and cash flow management, HR and staffing issues, and potentially any sector-specific issues. The Regional Business Partner Network will scale up their existing advisory services so that more businesses can receive support over the next 12 months. Existing helplines often used by businesses, such as those operated by the Employers and Manufacturers Association and the Canterbury Chamber of Employment and Commerce, will also be extended. These increased services will help businesses understand the support available to them.
Here are some resources that will find helpful and informative:
Our next post will follow shortly with information on Wage Subsidies – stay tuned.
If anyone would like further clarification or more information on the above, please contact me here.
Until then, stay safe, stay home and stay in your bubble!
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