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This week, the Government announced a suite of new measures for small and medium-sized businesses (”SME”) to assist with the severe impact of the COVID -19 pandemic on New Zealand economy as a whole and the SME sector in particular.

The Government emphasised that this package is aimed at further supporting SMEs’ cashflow and confidence, and to further protect employment. The release of the package should provide SMEs with some much-needed reassurance, particularly following the release of Treasury’s “COVID economic scenarios” (14 April 2020).

The Minister of Finance stressed the Government’s objective is to support businesses in staying solvent and being able “to help with the economic recovery” as New Zealand emerges from the Covid-19 crisis.

The new measures include:

  • $3.1 billion tax loss carry-back scheme (estimated cost over the next two years)
  • $60 million estimated annual savings to business each year from changes to the tax loss continuity rules
  • $25 million in the next 12 months for further business consultancy support
  • More flexibility for affected businesses to meet their tax obligations
  • Measures to support commercial tenants and landlords

Temporary tax loss carry-back scheme

The loss carry-back scheme will enable businesses to offset losses in a particular tax year against profits in a previous tax year, and receive refunds of the tax paid in the previous profitable year.

The proposed temporary mechanism will provide cash to businesses that are, or anticipate, being in loss position. A temporary mechanism will be included in a bill introduced the week of the 27th of April. Between now and then, Inland Revenue will be undertaking targeted consultation with tax advisors to make the law and administrative guidance “as clear as possible”.

The following example is provided in Government commentary on the scheme:

Wiki Hospitality Limited (Wiki) has had a profitable year for the year ended 31 March 2020. It has not yet finalised its tax return, but it is expected to return $2m net income. Its final provisional tax payment for the expected $2m income is coming up on May 7, where it expects to pay $250,000 in tax (it has already paid $310,000 in early provisional tax instalments). However, because of COVID-19, it is not operating at the moment, and does not know when it will be allowed to resume operating. It is still paying its staff (supported by the wage subsidy scheme) and rent. It seems inevitable that it will make a loss in the year ended 31 March 2021.

In early May, the directors meet with the CFO and forecast some scenarios. In all the scenarios, Wiki will make a loss of $1.5m for the year-ended 31 March 2021, although some scenarios sees it making a $2m loss. Knowing it will face use-of-money-interest charges if it over-estimates its loss, Wiki decides to carry-back the more certain loss of $1.5m to the 2019/20 year, and re-estimate its income for that year to $500,000 (down from $2m). Because it has already paid $310,000 in tax, it pays nothing on May 7, and receives a refund of $170,000 from its earlier provisional tax payment. In short, for the 2019/20 year, Wiki returns $500,000 of income and pays $140,000 tax, receiving back its earlier payments as refunds.

RSM New Zealand comment:

Different tax balance dates might have an impact on when a tax loss is made or expected.  Taking into account the timing of the COVID-19 pandemic, a tax loss due to COVID-19 is more likely to be recorded in businesses with later balance dates (e.g. 30 June or 30 September balance dates) in the 2020 tax year.  At the same time, businesses with earlier balance date (e.g. 31 December) are most likely to have a tax loss in the 2021 tax year.

We would expect to see the Government taking these points into consideration to ensure that those with 2020 tax losses can carry back losses temporarily as well as those incurred in 2021.

Another important consideration for business trading via a New Zealand company is their imputation position. As the carry back of a tax loss creates a refund of income tax, it is likely the government will cap any refund to the value of the imputation credit position as at the previous tax year. Companies that have paid imputed dividends may not be in a position to benefit from the loss carry back rules. This is more likely to be an issue if the carry back of tax losses is to the 2019 tax year as dividends are more likely to have been declared.

We recommend businesses contact us once these tax measures are introduced to further discuss the application of the rules.  Matters such as the timing of filing income tax returns, declaring dividends and resolving on shareholder salaries will need to be considered in addition to the tax losses forecasted.

Permanent tax loss carry-back scheme

The Government proposes a permanent loss carry-back scheme, applying to the 2021/22 and later income years.

There will be public consultation about this measure in the second half of 2020.  This is pleasing given such a scheme has been adopted by many OECD countries including the UK, USA, France, Germany and Canada to name a few.

Changes to tax loss continuity rules

New Zealand tax continuity rules are “amongst the most stringent in the world”. In recognition that businesses may need to raise addition capital, especially in the current economic climate, the Government has made an “in-principle” decision to change rules to make it easier for firms to raise new capital without losing the benefit of their existing tax losses.  This change was earlier signalled by the Government and was a final recommendation made by the Tax Working Group in late 2018.

Details around this are still being finalised and will be included in a bill in the second half of 2020. It is anticipated that these new rules will apply from the 2021 income year.

The proposal is that a ‘same or similar business’ test is applied meaning a business could carry forward tax losses on a shareholder change. To meet the test, the business must continue in the same or a similar way it did before ownership changed; a test modelled on Australia’s taxation rules. 

The following example is provided to illustrate how the rule will operate:

A start-up firm, Conference in the Clouds Limited (CIC) offers microphone and webcam software. It has been making large losses in recent years. However, it now wants to scale up significantly, given that more people are working from home and using videoconferencing. Despite its promising early-development software, banks are unwilling to lend to CIC without it having a firm revenue base. CIC has approached several investors, and has received an offer from a video conferencing company, Cloudcon Limited (Cloudcon), to inject millions of dollars into CIC in return for a 75% stake in the business. CIC wants to accept the investment, but is wary of losing the value of its losses, which would be extinguished under the current shareholder continuity test.

The government's new “same or similar business” test ensures that CIC can take on the new investor without losing its losses because its business will be of a same or similar nature as the business it was carrying on when it made the losses. Given this, the price CIC’s owners receive for the 75% equity stake is higher (the business receives a greater capital injection) as the ability to carry forward losses makes the business more valuable to investors.

Greater flexibility for business taxpayers in respect of statutory tax deadlines

Inland Revenue will have greater flexibility to modify timeframes or procedural requirements for taxpayers who are affected by COVID-19.

An amendment will introduce a discretionary power into the Tax Administration Act 1994 to allow Inland Revenue to provide an extension to due dates and timeframes, or to modify procedural requirements set out in the Revenue Acts. This could include, for example, extending deadlines for filing tax returns and paying provisional and terminal tax.

At this stage, the power will be time-limited for a period of 18 months and will apply to businesses affected by COVID-19.  More guidance will be published in the coming weeks on the use of this power by Inland Revenue.  

Further business consultancy support

Businesses will be able to access a mixture of free and subsidised tailored specialist support for a range of issues they may be currently facing, including business continuity planning, finance and cash flow management, HR and staffing issues, and potentially any sector-specific issues.

The Regional Business Partner Network will scale up their existing advisory services so that more businesses can receive support over the next 12 months.

Existing helplines often used by business – those operated by the Employers and Manufacturers Association and the Canterbury Chamber of Employment and Commerce – will also be extended. These increased services will help businesses understand the support available to them.

Measures to support commercial tenants and landlords

These changes would still allow landlords to cancel leases and mortgagees to exercise their powers during the period that an epidemic notice is in force, but would allow for more time for breaches or defaults to be remedied.

The Government is changing rules to allow commercial property owners, tenants and mortgagees more time to remedy disputes.

The timeframes required before landlords can cancel leases and mortgagees can exercise their rights to sale or repossession will be extended. Under new rules, commercial landlords will not be able to cancel tenancies as quickly as they currently can if tenants are not paying rent on time or are breaching their contracts. Instead of being able to cancel leases after 10 working days, landlords will only be able to do so after 30 working days.

The Government will also extend the timeframes for lenders from 20 to 40 working days for mortgaged land, and from 10 to 20 working days for mortgaged goods. This will apply to commercial mortgages and home loans. However, the already announced mortgage deferrals are likely to be the first port of call for residential borrowers.

As always, “the devil is in the detail” and we need to wait until the proposed legislation is introduced (it is expected that the provisions will be retrospective). We encourage you to contact us to discuss what measure would benefit your business once the detail is announced.