Tax loss carry back rules miss the mark
30 April 2020
The new tax loss carry back rules will not be the cash flow lifeline for most NZ businesses as heralded by the Minister of Revenue. Yes, there will be some businesses that will receive instant relief but for others it will be too little too late.
The new rules will apply in one or other of the following situations.
• The business made a profit in the 2018/19 tax year and a loss in the 2019/20 tax year.
• The business made a profit in the 2019/20 tax year and a loss in the 2020/21 tax year.
The tax loss can be carried back one year only, so it is not possible to carry back losses from the 2020/21 tax year to the 2018/19 tax year.
The tax year for most NZ businesses ends on 31 March. Some businesses would have seen a decline in revenue due to covid-19 during the 2-3 months prior to level 4 lockdown but for many the big losses will have arisen since 25 March 2020 when the full level 4 lockdown came into effect.
Common example for those most affected by covid-19 will be:
Example 1 - Reduced profit for the 2019/20 tax year and a big loss for the 2020/21 tax year. In this case there will be some relief, but the relief is limited by the amount of tax paid for the 2019/20 tax year. As the profit for this year was reduced then the refund of tax paid for that year will be reduced.
Example 2 - Small loss for the 2019/20 tax year and a big loss for the 2020/21 tax year. In this case the business will get some relief for the small 2019/20 loss which can be carried back to the 2018/19 tax year but will get no relief for the 2020/21 tax loss as there would have been no tax paid for the 2019/20 tax year. Any provisional tax paid for the 2019/20 year could be claimed back under existing rules, the refund is not increased by the new rules.
Example 3 - Normal profit for the 2019/20 tax year and a loss for the 2020/21 tax year. In this case there will be relief to the extent of the tax on the lesser of the profit for the 2019/20 year and the loss for the 2020/21 tax year.
Example 4 – Big loss for the 2019/20 tax year and big loss for the 2020/21 tax year. In this case there will be relief to the extent of the tax on the lesser of the profit for the 2018/19 tax year and the loss for the 2019/20 tax year. There will be no relief for the big loss for the 2020/21 year.
The businesses most affected by covid-19 are most likely to be within examples 1 & 2 above and so will receive minimal relief.
Another very practical problem is that it will take some time before losses for the 2019/20 year, let alone the 2020/21 tax year, are known. It is quite common for businesses to take up to 12 months to calculate their income or loss and file tax returns for the prior year. This can be accelerated but at best will still take 2-3 months for most businesses.
But, what about the anticipation option? It will be possible for provisional tax paid or payable for the 2019/20 year to be re-estimated to account for an anticipated loss for the 2020/21 year. This will be of no help to those who made a loss in the 2019/20 year since they will have no extra refund for the 2020/21 loss. It will also be extremely difficult for most businesses to accurately predict losses for the 2020/21 year given that we are currently only in the first month of the tax year and this is possibly the most uncertain business environment in recent history. It is an unprecedented situation and no-one knows whether there will be future covid-19 outbreaks and further lockdown periods in New Zealand or our trading partners.
If a business overestimates its 2020/21 loss and, on that basis, re-estimates its 2019/20 provisional tax, it will be charged interest by Inland Revenue. It is also possible that additional penalties could apply. Businesses will need to take some care in forecasting losses for the 2020/21 year at such an early stage.
Further complications could arise if there have been ownership changes or dividends have been paid in prior years. Tax losses may not be able to be carried back or taxes refunded if there have been significant ownership changes or the business is a company that has attached imputation credits to dividends paid in the 2018/19 or 2019/20 years.
The new tax loss carry back rules will provide some relief for some but not nearly as much as trumpeted. The rules are complex and many of those most affected by covid-19 may get nothing or only minimal relief.
Disclaimer:This information is general in nature and should not be relied on as advice. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs and seek professional advice before making any decisions based on this information.
Stay in touch. Please do not hesitate to contact your client advisor.