New Government Business and Tax Support
As at 16 Apr 2020
The government has announced yesterday further range of measures to assist businesses during the Covid-19 crisis. There is not a lot of details at the moment and work is underway on these. Here's what we know at the moment:
Tax Loss Carry-Back Scheme
This will enable businesses that have or will incur tax losses in the 2020 or 2021 financial year to offset this loss against a profit in the previous year. This will allow the business to receive a refund of the tax paid in the previous profitable year.
Here's a good example from IRD (edited to simplify it):
Wiki Wiki Hospitality Limited (Wiki) has had a profitable year for the year ended 31 March 2020 and is expected to return $2m net income. Its final provisional tax payment for the expected $2m income is coming up on May 7, where it expects to pay $250,000 in tax (it has already paid $310,000 in early provisional tax instalments).
However, because of COVID-19, it is not operating at the moment and it seems inevitable that it will make a loss in the year ended 31 March 2021. In all its forecast scenarios, Wiki will make a loss of $1.5m for the year ended 31 March 2021, although some scenarios see it making a $2m loss.
Knowing it will face use-of-money-interest charges if it over-estimates its loss, Wiki decides to carry-back the more certain loss of $1.5m to the 2019/20 year, and re-estimate its income for the 2019/20 year to $500,000 (down from $2m). Because it has already paid $310,000 in tax, it pays nothing on May 7 and receives a refund of $170,000 from its earlier provisional tax payment. In short, for the 2019/20 year, Wiki returns $500,000 of income and pays $140,000 tax, receiving back its earlier payments as refunds.
This temporary mechanism will be included in a bill introduced the week of the 27th of April and while it seems simple, the devil is in the details! We will update once we have more information.
Tax Loss Continuity Rules
Currently, if a company has more than a 51% change in ownership it cannot keep its tax losses.
IRD is looking to introduce a "same or similar business" test which will mean a business could carry forward its tax losses even if the 51% threshold is breached. To meet the test, the business must continue in the same or a similar way it did before ownership changed.
What this will allow is for companies looking to raise capital to keep afloat and do so while ensuring they could carry their tax losses forward to offset income when they return to profit.
IRD to have greater flexibility re statutory tax deadlines
IRD will temporarily be given greater flexibility to modify timeframes or procedural requirements for taxpayers who are impacted by COVID-19.
This could mean extending deadlines for filing tax returns and paying provisional and terminal tax.
As mentioned above, information is light at this stage and we wouldn't be able to confirm anything until more details are out. We will keep you in the loop as soon as we hear more.