Updated: Apr 20, 2020
The Government has announced a suite of new measures to provide relief for businesses during the COVID-19 pandemic.
Chief among the action points announced is a tax loss carry-back scheme. A tax bill will be introduced later this month (April) to enable this.
Other measures revealed include:
changes to the tax loss continuity rules
greater flexibility for taxpayers in respect of statutory tax deadlines
measures to support commercial tenants and landlords, and
further business consultancy support.
Tax-loss carry-back scheme
A loss carry-back mechanism enables a business entity to offset a loss in a particular tax year against a profit in a previous year, resulting in a refund of the tax paid in the previous profitable year. This gives cash to businesses that are, or anticipate, being in loss. A temporary mechanism will be included in the tax bill to be introduced the week beginning 27 April. Businesses expecting to make a loss in either the 2019/20 year or the 2020/21 year would be able to estimate the loss and use it to offset profits in the past year.
The permanent version of the scheme will be included in a later tax bill after public consultation has been carried out.
Inland Revenue’s website notes that taxpayers “do not need to rush to re-estimate their provisional tax before 7 May. Part of the proposed law change would make it possible for them to re-estimate it after the date of the final instalment. This will give them more time to work out any estimated loss for the 2020/21 income year.”
Between now and the end of April, Inland Revenue will be undertaking targeted consultation with tax advisors to make the law and administrative guidance as clear as possible. It is estimated that this scheme could lead to refunds and reduced tax owed of $1.2 billion in 2019/20 and $1.9 billion in 2020/21.
Loosening of the tax loss continuity rules
The tax loss continuity rules will be relaxed with the expectation that this will lead to an increase in physical/financial capital. The details of the changes will be included in a tax bill introduced in the second half of 2020. The new rules will apply for 2020/21 and later income years and will be modelled on the Australian rules with the introduction of a “same or similar business” test, meaning the business must continue in the same or a similar way it did before the ownership changed.
The Tax Working Group’s 2018 report had previously recommended a relaxation of the loss continuity rules