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In addition to the tax loss carry-back scheme, the New Zealand Government has introduced a number of other tax changes to assist businesses and individuals to get through COVID-19.

Currently, if an asset is purchased for less than $500 it does not need to be depreciated. The cost is immediately deductible in the year of purchase. This ‘low-value asset’ threshold has been temporarily increased from $500 to $5,000 for assets purchased in the 12 months from 17 March 2020. The threshold will reduce to $1,000 for assets purchased from 17 March 2021.

Tax depreciation on industrial and commercial buildings has been re-introduced for the 2021 tax year and onward. The diminishing value rate will be 2%, while the straight-line rate will be 1.5%. This is a permanent measure which will have a flow-on effect and improve the balance sheet of some large companies through the partial reversal of deferred tax liabilities.

The residual income tax threshold, which determines whether a taxpayer has a provisional tax obligation has been permanently lifted from $2,500 to $5,000 for the 2020-21 income year and onward. This is expected to remove 95,000 taxpayers from the provisional tax regime, assisting cash-flow and compliance related issues faced by individual taxpayers and small businesses.

Taxpayers affected by COVID-19 that are unable to physically or financially make tax payments will not be charged use of money interest (UOMI) on late payment of taxes from 14 February 2020. However, taxpayers will need to demonstrate to IRD that they have been “significantly adversely affected”. IRD is further offering taxpayers the opportunity to set up instalment arrangements to meet outstanding tax liabilities to those facing difficulty in paying outstanding amounts. Amendments to the Tax Administration Act 1994 have been made to give IRD greater discretion over its ability to allow extension of due dates and filing timeframes for taxpayers affected by COVID-19.

Changes to the tax loss continuity rules will be introduced. At present, an entity is only able to carry forward tax losses if shareholder continuity of 49% is maintained from the time a loss amount is incurred, until it is utilised. A ‘same or similar business’ test has been proposed, whereby a business can carry forward tax losses provided it continues to operate in the same or similar way, irrespective of a change in ownership. This test is being modelled on the current Australian loss carry forward rules. The change is targeted at taxpayers who are seeking new capital to stay afloat, without tax losses being forfeited due to a change in ownership. A ‘same or similar business’ test aims to instil confidence in prospective investors as to future cash-flow benefits from utilising the current period losses against future profits.

Finally, the extension of the new R&D tax credits rules to companies that incur tax losses, initially intended to be enacted effective from the 2020-21 tax year, has been brought forward to the 2020 tax year to allow timely access to the regime.

The package contains a number of measures designed to provide cashflow advantages. Hopefully there is something for everyone.

Ordinarily, if a taxpayer incurs a tax loss within a particular year, they are able to carry that loss forward and offset it against income derived in a future year, thereby reducing the taxpayer’s future tax payable. As part of the Government’s Covid-19 response, on 30 April 2020 legislation was passed under urgency which allows tax losses to be offset against income derived in a previous year, thereby enabling the taxpayer to obtain a refund comprising prior year income tax paid. This temporary tax loss carry-back scheme is available to most taxpayers, e.g. trusts, companies and individuals.

A permanent scheme to replace the temporary rules is under development and will apply from the 2022 income year, however, the current scheme applies for a two-year period as follows:

• A tax loss incurred in the 2020 income year is able to be carried back and offset against taxable income derived in the 2019 income year.
• A tax loss incurred in the 2021 year is able to be carried back and offset against taxable income derived in the 2020 year.

A tax loss cannot be carried back multiple years, instead it applies to the “net loss year” and the immediately preceding “taxable income year”.

Taking each year in succession, most taxpayers will have already filed their 2019 income tax return, but a request to amend that return can be made via MyIR or a letter can be sent to IRD requesting a reassessment (pursuant to section 113 of the Tax Administration Act 1994). The loss amount can be determined by either preparing a 2020 tax calculation based on ‘actual’ results or preparing an estimate. The ability to make an estimate allows taxpayers to access the refund faster. However, if an estimate of the 2020 tax loss is later found to exceed the actual loss amount, tax will need to be repaid to IRD, on which interest will apply.

With respect to utilising expected losses in the 2021 year against profits derived in the 2020 income year, in most cases the 2020 income tax return would not have been filed and may not be filed for some time, however 2020 provisional tax may have been paid to IRD. To enable provisional tax payments to be refunded, taxpayers will have the option of submitting an estimate of their 2020 provisional tax liability (that takes into account expected losses for 2021) – the time to do so has been extended to when the tax return is filed. Excess tax paid, based on the provisional tax estimate, will be refunded.

If a company incurs a loss and it is a member of a wholly owned group of companies, it can only carry back the amount that can’t first be offset against the income of other companies in the group.

If taxable income for the 2019 year was paid by way of shareholder salary, this cannot be reversed under the tax loss carry back initiative. However, provisional tax paid for the 2020 year in relation to an expected shareholder salary could be refunded under the initiative.

Under ordinary rules, 49% shareholder continuity must be maintained from the time a loss is incurred until it is utilised. A similar rule will apply to the loss carry back scheme, i.e. if there has been a change in ownership that breaches the threshold, a tax loss cannot be offset against income derived prior to the breach. However, part period calculations can be completed, as applicable.

The pragmatism underpinning this scheme will be appreciated as it allows sound businesses to secure a refund of tax paid in better times.

A series of legislative changes have been implemented over the past few years as part of the Government’s focus on ensuring multi-national corporations pay their fair share of tax.

International tax revenue represents approximately 10% of New Zealand’s tax revenue each year. Not only does it need to be preserved, but given international tax practices exhibited by some multi-national companies, it should be expected to grow. However, the changes do not just affect the likes of Google and Apple, but also smaller businesses that undertake cross border transactions.

One area of Inland Revenue’s (IRD) focus is the thin capitalisation (‘thin cap’) regime. Historically, if a NZ company had a loan from an overseas company in the same group, the NZ company could claim a full tax deduction for interest on the loan, providing the ‘debt to assets’ ratio (known as the thin cap ratio) was below 60%.

Although this test remains broadly the same, new legislation has changed the way the ratio is calculated, to reduce the asset value by liabilities that are not subject to interest. This is increasing the thin cap ratio.

Some businesses that have historically been below 60% are now above the threshold, and they are either restructuring their balance sheet to come back below 60% or accepting that their net interest deduction will be restricted.

A related measure is a new set of rules known as ‘Restricted Transfer Pricing’ (RTP). The RTP rule focuses on NZ companies with loans from overseas and seeks to ensure an appropriate rate of interest is charged. Previously a weak NZ balance sheet might have been used to justify a higher interest rate on an unsecured related party debt. However, the RTP rule requires the interest rate to be set with reference to the credit rating of the wider group’s parent company, ignoring non-commercial terms. This is generally giving rise to reductions in interest rates, thereby reducing interest deductions in NZ.

Further rules target ‘Hybrid Mismatch’ arrangements. These arise where a legal arrangement has different tax outcomes in different countries. For example, convertible loan notes are commonly treated as ‘loans’ in NZ, such that a deduction is available in NZ for interest payments. However, they are treated as ‘equity’ (i.e. shares) overseas, such that interest received overseas is not taxed.

A tax deduction in one country with no corresponding taxable income in another clearly erodes the global tax base. IRD’s new base erosion and profit shifting (BEPS) measures basically prohibit a NZ tax deduction if the amount received overseas is not subject to tax in that jurisdiction.

These rules are clearly complex and can be challenging for small and medium businesses to navigate. The IRD is attempting to ensure compliance with the new rules through the issue of a new BEPS disclosure form, which itself is complicated.

For affected entities, the new form applies for income years beginning on or after 1 July 2018. Encompassing these rules within the annual tax compliance requirements not only emphasises the importance of assessing the impact of the new BEPS measures, but also provides IRD with a platform to review and audit these disclosures.

A tax credit is able to be claimed on donations made to organisations and charities that are registered on Inland Revenue’s (IRD) list of Donee Organisations.

The amount of the credit is one third of the amount of the donation, and is limited to the amount of a person’s taxable income. The claims process is straightforward; donation receipts can be uploaded to a person’s online ‘MyIR’ account, and they are processed by IRD at the end of the tax year. However, as with many tax rules, there can be complexity.

The Income Tax Act 2007 requires a donation to be a “…gift of money of $5 or more…”, but there is little guidance on the meaning of the phrase. It is generally understood to require the gift to be of money and not goods or services. However, confusion arises because monetary gifts can take various forms. A dispute on the issue has been making its way through the Courts.

The taxpayers, Mrs Roberts and her late husband, created the Oasis Charitable Fund in 2007. Soon after its creation they lent the charity approximately $1.7m. Between 2011 and 2015, they signed several deeds of gift progressively releasing the charity from the obligation to repay the loan. On each occasion they claimed donation tax credits for the debt forgiveness.

By forgiving a portion of the loan amount each year, the donation rebate claims were maximised because the annual amount was kept under the ‘donor’s’ taxable income. Meanwhile, the charity was able to receive the benefit of the cash up-front.

The Commissioner disputed the donation rebate claims on the basis that debt forgiveness is not a ‘gift of money’, however both the High Court and Court of Appeal subsequently ruled in favour of Mrs Roberts. The Courts analysed historic legislation, as well as various dictionary definitions, and concluded that the words ‘gift of money’ mean more than just cash.

The decision was applauded by charities and philanthropists alike, as the flexibility of loan forgiveness encourages donations. However, this has been short-lived. On the same day as the Court of Appeal decision (17 December 2019), the Revenue Minister announced that the Court decision was contrary to the policy intent. The Minister’s statement made clear that donation tax credits should be limited to gifts of cash or cash equivalents only (i.e. bank transfers / credit cards) and should not be available for either debt forgiveness or other gifts in kind.

The Income Tax Act will be amended to reflect this intent. The change will be backdated to 1 April 2008, unless someone has already taken a tax position based on the old wording.

The charitable sector will need to wait and see whether this rule change will influence donors, and have an impact on the overall level of giving across New Zealand.