The Government has added to the COVID-19 tax package legislated for last month with a further set of measures, aimed primarily at small to medium businesses but which will have wider application.
Temporary loss carry-back scheme
Businesses that expect to make a loss in the 2019/20 or 2020/21 income years will be able to carry those losses back to offset profit in an earlier income year. This will permit a refund of tax already paid, rather than having to carry the loss forward and reduce future tax payments.
The provisional tax rules will also change to allow businesses to re-estimate provisional tax for the 2019/20 year after the third instalment date on 7 May 2020, giving them more time to estimate their loss for the 2020/21 income year for purposes of the loss carry back.
This measure is an effective means of targeting relief to businesses that need help now. Finer points will no doubt be worked through in targeted consultation ahead of the bill being introduced in the week of 27 April.
Important for some in determining how practically useful this intervention will be is whether the rules permit tax losses to be carried back beyond just the 2018/19 year.
Permanent loss carry-back scheme
A permanent loss carry-back scheme will also be introduced, to apply from the 2021/22 income year. Public consultation will occur in the second half of 2020.
Changes to the tax loss continuity rules
Currently, tax losses can be carried forward only where 49% shareholder continuity is maintained. This is out of line with other jurisdictions and presents a particular challenge now given the potential for capital raising to cause losses to be forfeited.
Recognising this, the Government has made an “in-principle” announcement to relax tax loss continuity rules, with application for the 2020/21 and later income years. There will be public consultation on the proposed changes in the second half of 2020, with legislation expected by the end of March 2021.
The proposal is to introduce a “same or similar business” test following the Australian model. This would permit businesses that have a change in shareholding to maintain their existing tax losses provided they continue to operate in a way that is the “same or similar” as before the change in ownership.
This change will also assist M&A activity as the economy recovers from the impact of COVID-19.
We strongly support this proposal, but would like to see the application date brought forward to the 2019/20 income year to ensure it can be applied to businesses with “late” balances dates (for example 30 June) raising capital during their 2019/20 income year.
Greater flexibility for taxpayers in respect of statutory tax deadlines
Last but not least, the Government is proposing to give Inland Revenue greater flexibility to modify timeframes and procedural requirements for taxpayers impacted by COVID-19. This will take the form of a new statutory discretion. It is expected that this power will apply to both businesses and individuals and is proposed to apply for a limited period of 18 months. Examples provided include extensions to due dates for tax returns and tax payments.
Again, this is a welcome response to current challenges and will provide a much clearer outcome for both taxpayers and Inland Revenue. Existing “care and management” provisions provide some ability for Inland Revenue to be flexible but generally take the form of agreements not to commit resource to investigate non-compliance.
Please contact the Chapman Tripp tax team if you would like more information about the measures discussed above and/or would like assistance in making submissions through the consultation process.
This is one of a series of Brief Counsels Chapman Tripp has produced on COVID-19.