But the Covid-19 measure needs professional advice
Auckland, May 28, 2020
From April 15, 2020, almost all entities, including trusts, companies, sole traders and partnerships can carry back the anticipated losses to avail tax refund.
The Scheme is another measure taken by the government to assist struggling New Zealand businesses to deal with economic impact of Covid-19.
The ‘Covid-19 Response (Taxation and Other Regulatory Urgent Measures) Bill’ has been enacted.
What is Loss Carry Back
Under current rules when you make a profit you pay tax on the profit.
When you make a loss, that loss is carried forward to offset against future income subject to loss continuity rules. The government has introduced Temporary Section IZ8 in the Income Tax Act 2007 to offset losses in the current and prior year of tax return.
It means that if your business is anticipating loss in 2020-2021 tax year, then you can use this loss in year 2019-2020 tax return.
The Scheme uses pair of years –‘Taxable Income Year’ and ‘Net Loss Year.’
You must also have had taxable income in the previous year, namely, the ‘Taxable Income Year.’
Losses would only be carried back for one year.
It means (a) Losses from the 2019-2020 year could be carried back to the 2018–19 year; and (b) Losses from the 2020-2021 year could be carried back to the 2019-2020 year.
For example: A tourism operator in Rotorua filed a tax return for the year 2018-2019. Profit for that year was $100,000 tax paid on this was $28,000 (28%). Now, for 2019-2020 year they incurred a loss of $100,000. This loss will be carried back to the filed tax return of 2018-2019 by amending the return. The amendment will result into a tax refund of $28,000. When 2019-2020 tax return is filed, it must show a loss of $100,000.
If the same tourism operator, anticipating low visitors in the region incurs a loss in 2020-2021 of $120,000, and a provisional tax of $30,000 is paid for the 2019-2020 year. An amendment to re-estimate of provisional tax can be submitted to receive a refund $30,000.
The above example shows how taxpayers would be able to claim a refund for a loss carry-back by re-estimating provisional tax (where the 2019-2020 is the taxable income year) or amending their tax return (where 2018–19 is the taxable income year).
The proposed provision also extends to shareholder-employees of a company who may have paid provisional tax.
The Scheme is not intended for individuals. A majority of individuals are taxed through the PAYE system and are subject to auto-calculation (qualifying individuals). They do not have losses and hence would not be affected by this measure.
However, those that operate businesses through partnerships, limited partnerships, and look-through companies would be able to benefit.
The scheme is not available for residential rental losses.
Taxpayers who have ringfenced rental losses would also not be able to carry back losses.
Multi-rate Portfolio Investment Entities (PIEs) (most unit trusts and KiwiSaver funds) may not carry back losses. They (including KiwiSaver) have tax cash-out for losses so already benefit from immediate tax relief for losses.
Companies imputation account must be in credit to obtain a refund of income tax of at least the amount of the refund at the end of the most recently ended tax year.
Overestimates and interest
If the loss carry-back is overestimated, resulting in tax to be paid later, standard use of money interest would apply in the normal way.
The taxpayer cannot use the remission of interest provisions in section 183ABAB of the Tax Administration Act 1994. The loss carry-back must ultimately be supported by a net loss shown on a tax return filed for the loss year.
If the tax return for the loss year is not filed, the loss carry-back deduction could be disallowed.
If the taxpayer owes a debt on other tax types, Inland Revenue will not apply any of the refund arising from the loss carry-back to satisfy tax debts.
Anti-avoidance provision is inserted in the Bill.
This would apply where a share in a company has been subject to an arrangement which allows a loss company to meet the requirements of the new section IZ8 and the purpose of that arrangement is to defeat the intent of section IZ8.
Saurav Wadhwa is a Chartered Accountant and a Tax Specialist. He is the Managing Director of the Auckland based firm IBBZ Accounting Limited. He can be reached on 027-5555458. Email: email@example.com; website: www.ibbz.co.nz