New Zealand’s government has proposed tax measures including tax loss carrybacks and a relaxation of tax loss continuity rules as part of a package intended to help businesses manage the impact of COVID-19.
On April 15 the government said it will introduce legislation within two weeks to allow businesses expecting losses for fiscal 2020 or fiscal 2021 to carry back the estimated amount of their losses for those years to offset taxable income in the prior period. “This change means we could refund some or all the tax already paid for the year they were in profit,” the Inland Revenue Department (IRD) said. “Without this change, firms would have to carry forward any loss to a year when they make a profit.”
Taxpayers do not have to re-estimate their provisional tax liabilities before the May 7 due date. “Part of the proposed law change would make it possible for them to re-estimate it after the date of the final installment,” the IRD said. “This will give them more time to work out any estimated loss for the 2020-2021 income year.”
The cost of the loss carryback scheme is estimated at NZD 3.1 billion (around $1.9 billion) over the next two years.
The government also said it will propose a permanent loss carryback scheme for fiscal 2022 and beyond, with a public consultation on the measure to be held in the second half of 2020.
The use of more liberal tax carryback and carryforward rules has been debated in other countries as a way of helping businesses that are struggling to survive the impact of COVID-19. In the United States, the recently approved Coronavirus Aid, Relief, and Economic Security Act includes a provision allowing a five-year carryback of losses incurred in 2018, 2019, and 2020.
Under current law, a New Zealand company that undergoes a change of ownership of over 51 percent cannot keep its tax losses. The IRD said the government intends to pass legislation before April 1, 2021, relaxing the tax loss continuity rules, effective for fiscal 2021 and later years. “The introduction of a ‘same or similar business’ test means a business could carry forward losses,” the IRD said. “To meet the test, the business must continue in the same or a similar way it did before ownership changed. This test is modeled on Australia’s rules.”
The IRD said some companies will look to raise capital in the near term to ride out the pandemic and to recover from its effects in the future. “Raising capital may result in a change to the existing shareholder structure,” the agency said. “Relaxing the rules will ensure [that] companies in this position could carry losses forward to offset income when they return to profit. Being able to carry forward losses makes the business more valuable to investors. The rules should improve access to capital for businesses.”
Businesses would save an estimated NZD 60 million a year from the proposed changes to the loss continuity rules.
“We need our businesses to stay solvent to help with the economic recovery as we emerge from this health crisis,” Finance Minister Grant Robertson said.
The government will also propose a measure giving the IRD discretion to change due dates, time frames, and procedural requirements set out in tax laws it administers. The provision would apply to businesses and individuals affected by COVID-19, the IRD said.