Tax measures aimed at supporting small to medium sized businesses.
The Government has announced further tax measures to support businesses during the continuing pandemic which are aimed at reducing your tax liability for provisional tax as well as make it easier for you or outside investors to inject capital into the business.
Those measures include:
Greater flexibility for business taxpayers in respect of statutory tax deadlines
Allows for customized filing and payment dates. At this stage, the power will be time-limited for a period of 18 months and will apply to businesses affected by COVID-19.
2. Changes to the tax loss continuity rules
Currently if more than a 50% shareholding change was to occur, all prior tax losses accumulated would be wiped out. This rule change allows for outside investors to come in to inject capital into the business without worrying about losing carried forward tax losses as long as the business activity hasn’t significantly changed.
The detailed design of the rules will be included in a bill in the second half of 2020. The new rules will apply for the 2020-21 and later income years.
Tax loss continuity example
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.
3. A tax loss carry-back scheme
A loss carry-back mechanism enables a firm to offset a loss in a particular tax year against a profit in a previous year and receive a refund of the tax paid in the previous profitable year.
This will apply for the 2020 tax year and beyond. A temporary mechanism will be included in a bill introduced the week of the 27th of April.
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.
We realise that some of our clients will qualify for this scheme, we’ll be in touch with those of you we believe are likely to do so.
Loss carry-back example
Wiki 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.
4. Measures to support commercial tenants and landlords
The Government will extend the current 10 working day timeframe that commercial landlords may cancel the lease to 30 working days. This will be for both the period the tenant is in arrears before the notice is given, and for the period to remedy the breach.
5. The ACC are here to help you.
They are suspending all collecting activity for unpaid invoices, in addition they are suspending all cover plus extra invoicing for three months. This means that for those of you on cover plus extra you won’t be receiving an invoice until after June. However, if you believe you won’t be able to pay your ACC invoice please contact ACC collection and recovery team as soon as possible.
Phone: 0800 222 776
Email: business@acc.co.nz
The government is due to announce details on alert levels 2 and 3 tomorrow, these details will govern the way we conduct business and live our lives for the foreseeable future. We are potentially heading into the lower alert levels next week, and with unemployment rates forecasted between 10 and 25% for the next couple years, the economy will be stagnant, so it’s very important you receive the best business advice possible to make sure your business is in the right place to weather the storm.
Contact us if you have any questions on the above. We will provide further updates after the Government announces further details this week.
We realise that many of you need much assistance and we are here to assist. We will be contacting many of you in the coming weeks but don’t hesitate to contact us first if needed.
Where would your business fit?