The Government has announced (April 15) a further set of tax proposals to help businesses manage the impacts of COVID-19. In summary:
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$3.1 billion tax loss carry-back scheme (estimated cost over the next two years)
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$60 million estimated annual savings to business each year from changes to the tax loss continuity rules
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$25 million in the next 12 months for further business consultancy support
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Greater flexibility for affected businesses affected to meet their tax obligations
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Measures to support commercial tenants and landlords
Temporary loss carry-back scheme
Businesses expecting to make a loss in either the 2019/20 year or the 2020/21 year would be able to estimate the loss and use it to offset profits in the past year. In other words, you could carry the loss back one year.
This change means a refund of some or all the tax already paid for the year your business was in profit. It means firms could cash out all or some of their losses in 2019/20 or 2020/21. Without this change, firms would have to carry forward any loss to a year when they make a profit.
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 you to re-estimate it after the date of the final instalment. This will give you more time to work out any estimated loss for the 2020/21 income year.
This temporary change should be introduced in a bill in the week beginning 27 April. Between now and then, officials will consult with tax advisors to ensure the law and administrative guidance is as clear as possible.
Permanent 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.
Changes to the tax loss continuity rules
The Government proposes relaxing the tax loss continuity rules. It intends passing legislation before the end of March 2021, and for it to apply to the 2020/21 and later income years.
Currently, if a company has more than a 51 percent change in ownership it cannot keep its tax losses.
The introduction of a ‘same or similar business’ test, means a business could carry forward losses. To meet the test, the business must continue in the same or a similar way it did before ownership changed. This test is modelled on Australia’s rules.
Some companies will be looking to raise capital to keep afloat now and to recover in the future. Raising capital may result in a change to the existing shareholder structure. Relaxing the rules will ensure companies in this position could carry losses forward to offset income when they return to profit.
Being able to carry forward losses makes the business more valuable to investors. The rules should improve access to capital for businesses.
Some businesses and investors will want to know now if the proposed changes will apply to them, however the government says it needs to take time to work with the tax community to make the law clear. There will be public consultation on the proposed changes in the second half of 2020. It is important the law changes prevent loss trading.
Allowing Inland Revenue to change due dates
The new proposal would give Inland Revenue discretion to temporarily change dates, timeframes and procedural requirements outlined in a number of Acts administered by them. This provision will apply to businesses and individuals affected by COVID-19. More details are to come.
Please contact your Moore Markhams advisor to discuss how this could benefit your business.