On 30 April 2020, the Government enacted a temporary measure to enable taxpayers to carry back tax losses as part of ongoing Covid-19 business support measures. This rule was effective from 15 April 2020 as part of the Government’s measures to look at broader tax loss rules.
With 31 March fast approaching, we take a moment to recap on the carry back scheme as enacted.
The temporary scheme is applicable to taxpayers who anticipate making losses in the 2020 or 2021 income year.
The temporary scheme enables taxpayers to carry back the tax loss and offset against the prior year if that prior year was profitable. It is important to note that losses can only be carried back one year from a net loss year to a taxable income year. This means:
- Losses from the 2019/20 year can only be carried back to the 2018/19 year, and
- Losses from the 2020/21 year can only be carried back to the 2019/20 year.
There is no ability to carry back losses from the 2020/21 year to the 2018/19 year.
The purpose of the scheme is to enable taxpayers to receive an immediate cash refund from tax paid in a prior year or reduce provisional tax liabilities and thereby assist with cash flow. The losses available to be carried back are limited to the taxable income made in the profit earning year.
One of the key features of the scheme is that the 2020 or 2021 losses can be estimated rather than waiting until the 2020 or 2021 tax return is filed and assessed. If the estimate is used a “square up” will be required when the income tax return for the “net loss year” is filed.
We understand that one of the measures announced by Government last year being consideration of a permanent loss carry back scheme will not proceed for fiscal reasons.
The scheme applies to all types of entities (i.e. companies, trusts and individuals). To be eligible a taxpayer must:
- Have made, or estimate that they will make, a tax loss in the 2020 or 2021 tax year (a “net loss year”);
- Have taxable income in the income year before the “net loss year”;
- Elect into the loss carry back scheme;
- Meet the 49% shareholder continuity requirement for the relevant years to carry back losses (if the taxpayer is a company)–mirroring requirements for the carrying forward of losses.
Amount of Loss
The amount that may be carried back is the lesser of the profit in the earlier year or the loss in the “net loss year”, unless the person elects a smaller amount.
In other words, the amount that can be carried back is the smallest of:
- the net loss (in 2019/20 or 2020/21) before adjusting for the carry-back
- the taxable income in the previous year (2018/19 or 2019/20) before adjusting for the carry-back, or
- the amount elected by the person.
Things to Consider:
- Not applicable to multi-rate PIEs (most unit trusts and KiwiSaver funds). Multi-rate PIEs already benefit from immediate tax loss relieve due to the tax cash-out for losses.
- Taxpayers who have ring-fenced rental losses must carry forward any unused loss, there is no ability for them to be carried back under the temporary measure. There are no changes expected to be made to the loss ring-fencing rules regardless of the impact COVID-19 had on some landlords.
- Restrictions on a carry back will arise on taxpayers who have made charitable donations in the income year before the “net loss year”. The amount of carry-back losses in this case would be limited to the amount of taxable income reduced by the amount of credits for charitable donations received in the relevant year.. However, this restriction will not apply to a company.
- Use of Money Interest (UOMI) - many businesses may take the opportunity to estimate losses incurred in the 2021 income year and carry back to the 2020 income year to access a cash refund. Taxpayers should tread carefully and be mindful when estimating losses. If the business over-estimates its loss resulting in a refund of provisional tax payments, this could lead to exposure to UOMI under the standard rules. We therefore recommend businesses to take a conservative approach and be fairly confident prior to electing into the loss carry back scheme for the 2021 income year.
- Group companies subject to the grouping rules for tax losses. If group companies take the advantage of the loss carry back scheme, they must be 66% commonly owned from the beginning of the profit year to the end of the year of loss (if a loss company carries back its loss to offset against the income of other group companies). If a group of companies elects into this scheme, the losses are first to be offset to extent of group profits in the “net-loss year”.
- Refunds limited to amount imputation credit account (ICA) balances. For companies receiving any income tax refunds, the amount is generally limited and capped at their credit balance in their ICA at the date of their most recent filed ICA account.
The scheme certainly would benefit taxpayers who anticipate making losses in the 2020 or 2021 income year. It is a positive move by the Government to provide immediate cash relief. However, there are risks and a few considerations, e.g. UOMI where estimating and ICA balances being available.
We highly recommend you contact us to discuss ramifications for your business prior to electing into the scheme. We are disappointed that although the scheme applies to the majority of taxpayers, it does not apply to residential rental losses that are ring-fenced from 1 April 2019.
A number of landlords are also cash strapped and the Government should have allowed such losses to be carried back to a previous income year, at least against profits arising from a residential rental activity.