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New Zealand Passes Loss Carryback Law to Provide Pandemic Relief

Posted on May 4, 2020

New Zealand’s Parliament has passed emergency tax relief legislation that allows companies to carry back losses and gives Inland Revenue power to vary administrative requirements and time frames.

On April 15 the government said it would introduce legislation 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. The carryback measure, which allows qualifying companies to claim refunds instead of having to carry forward losses to future years when they generate taxable profits, was approved by Parliament on April 30.

Revenue Minister Stuart Nash said April 30 that the legislation will allow businesses to claim more than NZD 3 billion (around $1.8 billion) in tax refunds to deal with the economic impact of the COVID-19 pandemic. “This response delivers the single biggest government support package to businesses via the tax system in modern New Zealand history, and more is yet to come,” he said. “The tax refunds will be a cash lifeline for businesses with non-wage fixed costs, like rent, interest, and insurance.”

When the government first proposed the carryback measures, it said it would also 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. “Officials' guidance indicates that the permanent regime may be more traditional, such as not allowing a refund before the loss has been established, and may have more integrity measures,”  an April 30 client note published by the Russell McVeagh law firm says. “The longer-term regime may provide for a one-year or two-year loss carry-back.”

New Zealand has an imputation credit system whereby taxes paid by a company generate credits that can be “attached” to the dividends that it pays out. Shareholders can apply the imputation credits to lower their tax liabilities related to the dividend income, thereby eliminating double taxation. The carryback provision requires that a company have sufficient imputation credits under existing rules for claiming a tax refund.

Brendan Brown, national chair of Russell McVeagh’s tax practice, told Tax Notes that Inland Revenue guidance states that a company must either have an imputation credit balance at least equal to the amount of the refund at the end of the most recent tax year or file an interim imputation return up to the date of the refund request. “The requirement for the company to hold sufficient imputation credits to obtain a tax refund is there to stop a company getting a refund of tax if the imputation credits generated by that tax have already been passed to (and used to reduce tax payable by) shareholders,” he said in an email.

While the carryback measure does not include a provision allowing for the offset of a net loss incurred by a closely held company against the net income of a shareholder-employee in a prior year, a shareholder-employee whose salary has been reduced might still be entitled to a refund of tax, according to Russell McVeagh. “The amount of any tax refund, for example, may depend on the amount of tax already paid by the shareholder and the amount of the reduction in the shareholder salary,” Brown said. “We would expect that shareholder-employees are reviewing the amount of any shareholder salary in light of economic conditions.”

Russell McVeagh said the new rules do not appear to allow a taxpayer that has an outbound investment in a controlled foreign company and is required to recognize attributed income under the CFC rules to carry back an attributed CFC net loss in one year against attributed CFC income in the previous year. “It may be that this issue will be addressed in the design of the permanent loss carryback rule,” Brown said.

Loss carrybacks are subject to maintaining both the 49 percent continuity of ownership requirements that are applicable to loss carryforwards and the 66 percent commonality of ownership requirement for tax loss groupings, Russell McVeagh said. “The 49-percent continuity of ownership requirement will limit the availability of the regime to companies that have been, or are in the process of being, sold or are raising new capital,” the firm said in its client note. “It is hoped that the same-or-similar business test that is to be introduced as an alternative to the 49-percent continuity threshold for the carryforward of tax losses . . . will also apply as an alternative to that test for the carryback of losses, at least once the permanent loss carryback rules are enacted.”

A business acquisition agreement will normally include a tax indemnity clause making the seller liable to the buyer if the acquired company’s tax position ultimately turns out to be worse than it was represented to be prior to the sale. Brown said that under current law, tax losses are forfeited when there is a change in ownership of a company of more than 51 percent. “Following the proposed changes to the loss carryforward rules, which will enable tax losses to be carried forward provided a company continues to carry on the same or similar business even if its ownership has changed, such a tax indemnity could extend to a situation in which tax losses of the company assumed to be available are not in fact available,” he said.

Russell McVeagh said the tax reforms will likely affect market standard documentation for business acquisitions. The firm said that if the parties to a business acquisition agree that tax losses being sold have a value that is reflected in the purchase price, the buyer will expect to have coverage for such tax losses under the tax indemnity. “Existing New Zealand share sale agreements may not provide for this, given they will be drafted on the assumption that tax losses will be forfeited on sale of the shares in a company,” the client note says.

The new legislation allows Inland Revenue to extend legal due dates and modify procedural or administrative requirements for 18 months in circumstances in which it would be impossible, impractical, or unreasonable for taxpayers to comply because of the pandemic.

On April 29 Inland Revenue issued guidance saying it will not pursue parties who are technically considered tax residents under rules pertaining to physical presence or management control and board of directors meetings only because they are “stranded” in the country because of travel restrictions brought on by the pandemic. The department addressed the situation of a person who remains in New Zealand beyond the 183-day limit for establishing tax residency. “If a person leaves New Zealand within a reasonable time after they are no longer practically restricted in traveling, then extra days, when the person was unable to leave, will be disregarded,” Inland Revenue said. “The day tests are based on normal circumstances when people are free to move.”

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