The Government has legislated to provide further tax relief for business and allow for interest free loans to help small businesses with their immediate cash flow needs and fixed costs.
The principal tax changes are:
a temporary loss carry back scheme (expected to be replaced with a permanent scheme following further consultation later in the year), and
discretionary power for the Commissioner of Inland Revenue to allow flexibility for due dates, deadlines, time periods, timeframes or procedural and administrative requirements for taxpayers affected by COVID-19.
Inland Revenue will also administer the cashflow loan scheme.
Temporary loss carry-back scheme
The scheme applies to almost all types of taxpayers – companies, trusts, individuals – and is available where a taxpayer has (or expects to have) a net loss for the 2019/20 or 2020/21 tax year (the Loss Year) and has paid tax in the year immediately prior to the Loss Year (the Profit Year).
This will permit a refund of tax already paid, rather than having to carry the loss forward and reduce future tax payments. Tax losses cannot be carried back to the extent that they are greater than the taxpayer’s taxable income in the Profit Year, unless the taxpayer is in a corporate group.
Under the scheme, tax losses cannot be carried back earlier than the 2018/19 year. This may limit the scheme’s utility, particularly where a taxpayer has losses across both the 2019/20 and 2020/21 tax years.
If the Loss Year is:
the 2019/20 tax year, the taxpayer may request an amendment to their 2018/19 income tax return in order to access a refund for the tax paid for the Profit Year
the 2020/21 tax year, the taxpayer can access the refund now by re-estimating their provisional tax liability for the 2019/20 tax year. The deadline for re-estimating provisional tax is extended from the final instalment date until the earlier of the date that the tax return is due or filed.
In the case of a company, the following additional requirements for carrying back losses apply:
- the loss continuity requirement of 49% shareholder continuity must be met over the relevant period of the loss carry back, and
- any refund is limited to the credit balance in the company’s imputation credit account at the end of the most recently ended tax year (or at the date of the refund request if an interim imputation return is completed).
A specific anti avoidance rule applies where a company has entered into an arrangement with the purpose of defeating the intent and application of the scheme.
For taxpayers in a corporate group, the loss may be carried back and offset against income in the Profit Year of the corporate group members (provided at least 66% shareholder commonality). However, losses cannot be carried back to the extent that those losses can be used in the current income year by members of a wholly owned group of companies.
The scheme will be of limited use for trusts, as in order for a trust to obtain a refund of tax paid in an earlier income year, that income will need to have been taxed as trustee income at the trustee rate. Where income has been distributed as beneficiary income in an earlier year, trusts remain unable to distribute or apply losses against beneficiary income.
Commissioner’s temporary discretionary power
This new statutory discretion gives Inland Revenue greater flexibility to modify timeframes and procedural requirements for taxpayers impacted by COVID-19 for a limited period ending on 30 September 2021 (unless extended by Order in Council). This includes powers to extend due dates for tax returns and tax payments.
Small business cashflow loan scheme
This will be limited to firms employing no more than 50 full-time equivalent employees. Up to $10,000 will be available for the firm, plus up to $1,800 per full time employee (to a maximum of $100,000).
Loans will be interest free if they are repaid within a year. The interest rate will be 3% for a maximum term of five years, with no repayments required in the first two years.
Inland Revenue will take applications from 12 May, with eligibility criteria the same as for the Wage Subsidy Scheme.
The Government statement can be accessed here.
Still to come
Although not provided for in the newly enacted legislation, the Government has again indicated that a permanent loss carry-back scheme will be introduced in the future to apply from the 2021/22 tax year (with the permanent regime possibly providing for a one year or two year loss carry-back).
Public consultation will occur in the second half of 2020.
We also expect a proposed change to the current tax loss continuity rules (currently, tax losses can be carried forward only where 49% shareholder continuity is maintained). The Government is proposing to introduce a “same or similar business” test, with application for the 2020/21 and later income years.
This would permit businesses that have a change in shareholding to maintain their existing tax losses going forward provided they continue to operate in a way that is the “same or similar” as before the change in ownership. These proposed changes will not affect the temporary loss carry-back scheme.
Contact a member of Chapman Tripp’s Tax team to discuss the legislation in further detail.
This is one of a series of Brief Counsels Chapman Tripp has produced on COVID-19.