Loss Carry Back Scheme.

From 15-04-2020 almost all entities trust, companies, sole trader, partnership can carry back the anticipated losses to avail tax refund. The scheme is another measure taken by the Government to assist struggling New Zealand business to deal with economic impact of Covid-19. The bill Covid-19 Response (Taxation and Other Regulatory Urgent Measures) is enacted now.

What is loss carry back

Under current rules when you make a profit you pay tax on the profit. And when you make a loss that loss is carried forward to offset against future income subject to loss continuity rules. The Government has introduced temporary section IZ8 in the Income Tax Act 2007 to offset loss in the current and prior year of tax return. It means if your business is anticipating loss in 2020-21 tax year, then you can use this loss in year 2019-20 tax return.

How does the scheme work

The scheme uses pair of years “taxable income year” and “net loss year”. You must also have had taxable income in the previous year – the taxable income year. Losses would only be carried back for one year. It means

• losses from the 2019–20 year could be carried back to the 2018–19 year; and
• losses from the 2020–21 year could be carried back to the 2019–20 year.

For example: A tourism operator in Rotorua filed a tax return for the year 2018-2019. A profit for that year was $100,000 tax paid on this was $28,000(28%). Now for 2019-20 year they incurred a loss of $100,000. This loss will be carried back to the filed tax return of 2018-19 by amending the return. The amendment will result into a tax refund of $28,000. When 2019-20 tax return is filed it must show a loss of $100,000.

Similarly, if the same tourism operator anticipating low visitors in the region and a loss in 2020-21 of $120,000. And a provisional tax of $30,000 is paid for the 2019-20 year. An amendment to re-estimate of provisional tax can be submitted to receive a refund $30,000.

Above example shows how taxpayers would be able to claim a refund for a loss carry-back by re-estimating provisional tax (where the 2019–20 is the taxable income year) or amending their tax return (where 2018–19 is the taxable income year).

Details of the Scheme

• The proposed provision also extends to shareholder-employees of a company who may have paid provisional tax.

• The scheme is not intended for individuals. The majority of individuals are taxed through the PAYE system and are subject to auto-calculation (qualifying individuals) do not have losses so would be unaffected by this measure. However, those that operate businesses through partnerships, limited partnerships, and look-through companies would be able to benefit.

• The scheme is not available for residential rental losses. Taxpayers who have ringfenced rental losses would also not be able to carry back losses.

• Multi-rate PIEs (most unit trusts and KiwiSaver funds) may not carry back losses. Multi-rate PIEs (including KiwiSaver) have tax cash-out for losses so already benefit from immediate tax relief for losses.

• Companies imputation account must be in credit to obtain a refund of income tax of at least the amount of the refund at the end of the most recently ended tax year.

• If the loss carry-back is overestimated, resulting in tax to be paid later, standard use of money interest would apply in the normal way. And the taxpayer cannot use the remission of interest provisions in section 183ABAB of the Tax Administration Act 1994

• The loss carry-back must ultimately be supported by a net loss shown on a tax return filed for the loss year.

• If the tax return for the loss year is not filed, the loss carry-back deduction could be disallowed.

• If the taxpayer owes a debt on other tax types, Inland Revenue would not apply any of the refund arising from the loss carry-back to satisfy tax debts.

• Anti-avoidance provision is inserted in the bill. This would apply where a share in a company has been subject to an arrangement which allows a loss company to meet the requirements of the new section IZ 8 and the purpose of that arrangement is to defeat the intent of section IZ 8.