New Changes To Tax-Loss Continuity Rules

New Changes To Tax-Loss Continuity Rules

There are some recent updates and changes which have been made to tax-loss continuity rules in light of the recent resurgence of Covid-19 in 2021. These changes are aimed at understanding the needs of businesses to raise additional capital to stay operational.

The legislation is aimed at being passed before the end of March, 2021 and will be applicable for the 2021/22 tax year and later income years as well.

As part of the changes being made, the government has announced the “same or similar business test”.

Currently, the law states that if a company or an organisation has more than a 51% change in ownership it cannot keep its tax losses. With the introduction of the ‘same or similar business’ businesses can now carry forward their losses. In order to meet the requirements of the test, the business in question must continue in a same or similar way to how it did prior to the change in ownership.  

Companies at this point in time might be looking to raise capital to keep afloat for now and to recover in the future. Raising the capital though, may result in a change to the existing shareholding structure within the company. The changes which are aimed to relax the rules will ensure companies in this position can carry forward losses to offset income when it turns to profit. The ability to carry forward losses will help in making the business more valuable to investors. The new rules should also help in improving access to capital for businesses. 

The same or similar business test is essentially a business continuity test which allows a company to carry its losses forward after a change in ownership, as long as the underlying business continues.

Even with the new changes, this doesn’t imply that the 49% continuity test has been replaced in any way. If a company continues to satisfy the existing 49% of the rules, they won’t have to rely on the Business Continuity Test.

There is no change to the commonality rule either which requires 66% commonality of ownership for companies to offset losses. In case one company acquires another company with losses, it will be not be able to offset pre-acquisition losses from that company. In case the company being purchased is a dormant company the test will not allow dormant companies to carry forward those losses.

All carry-forward losses won’t be subject to the test. Only losses incurred from the 2013/14 year onwards will be able to be carried forward under this test.

Some more guidance on the law will be released in draft after the SOP is released. However, if you have any queries regarding the proposed changes or how it might affect your business, feel free to get in touch with us by mailing us at info@jzr.co.nz or by calling us on +64-9-972-2236.

Written by Rowain Pereira

Related Articles

New Changes To Tax-Loss Continuity Rules

There are some recent updates and changes which have been made to tax-loss continuity rules in light of the recent resurgence of Covid-19 in 2021. These changes are aimed at understanding the needs of businesses to raise additional capital to stay operational. The...

COVID-19 Support Payments 2021: All You Need To Know

We at JZR Accountants & Consultants hope everyone is keeping safe during this lockdown period. Things have certainly changed very fast as we go into alert level 3 again here in Auckland. To do our part for the community, we would like to let you know the latest...

Recent Tax Changes That May Impact You

The saying that “the only constant in life is change” is particularly due when it comes to tax. Tax legislation is constantly changing, and depending on your perspective, it could be either good or bad. But either way, it will impact on you as a business owner....

Stay Up to Date With The Latest News & Updates

Join Our Newsletter

Stay up to date with all of the latest news and insights related to your business. Sign up below and we promise to only send you content 

Recent Tax Changes That May Impact You

Recent Tax Changes That May Impact You

The saying that “the only constant in life is change” is particularly due when it comes to tax. Tax legislation is constantly changing, and depending on your perspective, it could be either good or bad. But either way, it will impact on you as a business owner.

There’s been some changes to tax legislation and we have summarised the most important changes which could impact on you.

  1. New top personal income tax rate of 39%
  2. Increase disclosure requirements for trusts
  3. Changes to the Small Business Cashflow Scheme

 The New Top Tax Rate

 A new top tax rate of 39% will apply on personal income in excess of $180,000 for the 2021-2022 and later tax years. For most taxpayers this begins on 1 April 2021. We will be contacting those clients affect by this change to discuss your options in the coming months.

It’s also worthwhile to consider topping up your provisional tax payments throughout 2021 to account for the larger year-end tax bill. Alternatively, we can assist you to purchase tax from Tax Management New Zealand if you happen to miss a payment.

There are corresponding changes to other tax types to align with the 39% rate. These can be found in the table below:

 

Impacted Area

Detail

New Rate

Applicable From

Secondary tax codes

A new tax code (SA) for secondary employment earnings for an employee whose total PAYE income payments are more than $180,000.

39%

1 April 2021

Extra pays

For extra pays for employees with taxable income exceeding $180,000.

39%

1 April 2021

Fringe benefit tax (FBT)

A new top FBT rate will apply to all-inclusive pay exceeding $129,680.

63.93%

1 April 2021

Resident withholding tax (RWT)

The Bill introduces a new RWT rate that mirrors the new top personal rate.

39%

1 October 2021

 

Increased Disclosure Requirements for Trusts 
In addition to the introduction of the new Trusts Act 2019, which will come into force on 30 January 2021, Inland Revenue will require trusts to provide more information on their annual returns for the 2021-2022 income year onwards, including:

  • Distributions and settlements made in the income year; and
  • Profit and loss statements and balance sheets.

This ensures Inland Revenue has a clear picture of how a trust is being used and whether the usage changes as a result of the personal income tax rate change to avoid paying tax, given that the trustee income tax rate remains at 33% (as opposed to the top marginal tax rate of 39%)

The Commissioner can also request the information from trusts for prior years back to the 2013-2014 tax year as appropriate. This allows for comparable information to be gathered.

The increased disclosure requirements do not apply to non-active trusts, charitable trusts and trusts eligible to be Māori authorities. What this essentially means is that Inland Revenue will pay closer attention to your family trusts to see if you’ve been paying the right amount of tax.

 

The Small Business Cashflow Scheme Changes

 
The loan will now be interest free for 2 years (up from 1 year), and restrictions on how the loan can be used have eased. As well as spending on core operating costs, businesses will be able to choose to use the loan to invest in their business, helping it to adapt to the impact of COVID-19.

There are also changes to the eligibility criteria in the following 4 areas:

  1. When the business was established
  2. The decline in revenue test
  3. Employee number test
  4. Re-borrowing

The changes will be in effect from 28 January 2021. Note that the change in the decline in revenue test will significantly change which businesses are eligible as the time period will no longer include the April 2020 lock down.

There are a few more details and if you want to see the full changes, please visit Inland Revenue’s website here. (ird.govt.nz/updates/news-folder/upcoming-changes-to-the-eligibility-criteria-for-the-small-business-cashflow-scheme)

Applications for the scheme will remain open until 31 December 2023.

 

Lastly, we are here to help. If you have any questions regarding the changes or need to have a chat about your tax affairs, please do not hesitate to contact us at info@jzr.co.nz, or call 09-9722236.

Written by Gordon Tian

Tax

Related Articles

New Changes To Tax-Loss Continuity Rules

There are some recent updates and changes which have been made to tax-loss continuity rules in light of the recent resurgence of Covid-19 in 2021. These changes are aimed at understanding the needs of businesses to raise additional capital to stay operational. The...

COVID-19 Support Payments 2021: All You Need To Know

We at JZR Accountants & Consultants hope everyone is keeping safe during this lockdown period. Things have certainly changed very fast as we go into alert level 3 again here in Auckland. To do our part for the community, we would like to let you know the latest...

Recent Tax Changes That May Impact You

The saying that “the only constant in life is change” is particularly due when it comes to tax. Tax legislation is constantly changing, and depending on your perspective, it could be either good or bad. But either way, it will impact on you as a business owner....

Stay Up to Date With The Latest News & Updates

Join Our Newsletter

Stay up to date with all of the latest news and insights related to your business. Sign up below and we promise to only send you content 

A Summary of all the Tax Changes and Support Schemes for COVID-19

A Summary of all the Tax Changes and Support Schemes for COVID-19

The year 2020 and the world’s current economic status has taken a battering with the outbreak of COVID-19. With governments racing to create relief and incentive schemes for local businesses, the purpose of this article is to simply outline all the key tax changes and support schemes that have been introduced by the government of New Zealand  to help local businesses mitigate the impact of COVID-19.

Major Tax Changes

1.     Reintroducing Depreciation on Commercial & Industrial Buildings

All depreciation deductions will be reintroduced for new and existing industrial and commercial buildings, including hotels and motels. There is no application process as the increased deduction will be available as part of normal tax filing processes. For more information click here.

2.     Immediate Deductions on Low Value Assets

Businesses will be able to deduct the full cost of more low-value assets in the year they were purchased, rather than having to spread the cost over the life of the asset. Currently, taxpayers are able to claim immediate deductions on the purchase of assets valued at lesser than $500. The threshold for this will now be increased to include assets that cost up to $5000 (for the 2020/21 income year).

The temporary increase in the threshold, is designed to incentivise businesses to bring forward investments to encourage spending. The threshold is being permanently increased to $1,000 (from 2021/22). For more information click here.

3.     Change to Provisional Tax Threshold

The government has increased the threshold for having to pay provisional tax from $2,500 to $5,000 for the 2020/2021 financial year only. For more information click here.

4.     Writing Off Interest On Some Late Payment Tax

The IRD has been given the power to waive interest on late tax payments for businesses who’ve had their ability to pay their taxes on time significantly affected by the Covid-19 outbreak. The relief will apply to interest on all tax payments (including PAYE & GST) due on or after the 14th of February, 2020. For more information click here.

5.     Change to Carrying Forward of Tax Losses

The government has introduced a ‘same or similar business’ test, which 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. A bill will be introduced in the second half of 2020 after consultation with tax advisors, and will apply for the 2020-21 and later income years. 

6.     The Temporary Loss Carry Back Scheme

Businesses that are expecting to make a loss in 2019/20 or the 2020/21 financial year will be able to estimate the loss and use it offset profits in the past year. The scheme introduces the concept of offset years, which are the pair of years affected by the carry-back. The first year is named as the taxable income year and the second as the net loss year. For more information click here.

Simply put, this means that they can carry their losses back a year. This will allow the IRD to refund some or all of the tax paid for the year in which the business was in profit. For more information click here.

 Business Support Schemes

1.     Wage Subsidy Resurgence

A new Resurgence Wage Subsidy Scheme payment has been announced by the government for employers and self-employed people who have been impacted by the recent resurgence of COVID-19.

All New Zealand employers who have had or expect to have a drop in their revenues of at least 40% due to the resurgence of COVID-19 may apply for the scheme. Businesses must show a drop of at least 40% in their revenues for a 14 day period between the 12th of August to the 10th  of September, compared to a similar period last year. Application dates for the scheme are open from 1pm on the 21st of August until the 3rd of September 2020. For more information on eligibility criteria and how you can apply, please click here.

2.     Small Business Cashflow Scheme 

The small-business cash-flow scheme (SBCS) will provide interest free loans for a year to small businesses which have been impacted by the COVID-19 to help support their cash-flow needs and fixed costs as well. The scheme will provide assistance of up to $100,000 to firms employing 50 or fewer full time employees.

The scheme will provide $10,000 to every firm, and an additional $1,800 per equivalent full-time employee. To further encourage businesses the loans will be interest free if they’re paid back within a year. If the loan amount cannot be repaid within a year, then a 3% interest fee will be charged for a maximum period of five years. Repayments are not required for the first two years.

3.     Business Finance Guarantee Loan Scheme

The scheme will include a limit of $500,000 per loan and will apply to firms with a turnover of between $250,000 and $80 million per annum. The loans will be for a maximum of three years and expected to be provided by the banks at competitive, transparent rates. The scheme is also only available to financially solvent firms (i.e. firms whose assets are greater than their liabilities).

As a New Zealand small business owner if you would like to apply for any of the schemes or would like us to help you with issues your business might be facing, please contact us on info@jzr.co.nz or call us on +64-9-972-2236

 

Written by Rowain Pereira

Tax

Related Articles

New Changes To Tax-Loss Continuity Rules

There are some recent updates and changes which have been made to tax-loss continuity rules in light of the recent resurgence of Covid-19 in 2021. These changes are aimed at understanding the needs of businesses to raise additional capital to stay operational. The...

COVID-19 Support Payments 2021: All You Need To Know

We at JZR Accountants & Consultants hope everyone is keeping safe during this lockdown period. Things have certainly changed very fast as we go into alert level 3 again here in Auckland. To do our part for the community, we would like to let you know the latest...

Recent Tax Changes That May Impact You

The saying that “the only constant in life is change” is particularly due when it comes to tax. Tax legislation is constantly changing, and depending on your perspective, it could be either good or bad. But either way, it will impact on you as a business owner....

Stay Up to Date With The Latest News & Updates

Join Our Newsletter

Stay up to date with all of the latest news and insights related to your business. Sign up below and we promise to only send you content 

What’s New for Property Owners: Airbnb to Boarders

What’s New for Property Owners: Airbnb to Boarders

If you own a property which is being rented out for short stays (up to four weeks) this article will highlight all your necessary tax commitments, as well as all the new property rules which might come into effect this financial year.

Highlights:

  • If your tax due at the end of the year is $2500, you will have to pay provisional tax instalments from the following year.
  • If you’re earned income is more than $60,000 per year, from taxable activities, it is mandatory for you to register for GST.

It would be wise here, given the choice, for you to consider whether registering for GST is the best option for you. Once you’ve registered for GST, there are on-going requirements like record keeping, invoicing and filing returns which must be maintained. Once you’ve registered for GST, it also means that the sale of that property, or even the discontinuation of services, will still be liable to GST. For more insight to help you make the right decision, you can call us for advice.

If you own a property where you host boarders, you need to choose between the standard-cost method and the actual cost method to work out the income you make from boarders so you know how much tax to pay.

The standard-cost method keeps things simple, because when your income from a boarder is equal to or below the standard costs, it’s exempted from tax. You can also claim standard costs instead of claiming on actual expenses. The weekly standard cost per boarder has been changed to $186 per week for the 2019/20 tax year. The standard cost includes everything from food, household bills, gifts, and entertainment and activities that you provide for the boarder. You’ll also need to calculate your annual hosting and transport costs.

In case you’re hosting five or more boarders at your property, the actual-cost method must be used. If you’re hosting up to four boarders you can then choose to claim actual costs instead of standard costs. When using the actual cost method, all the income generated from the rental is considered to be assessable income and must be declared. While using the actual cost method to calculate your income you will have to:

  • Keep full records of your actual income
  • Keep full records of your expenses
  • Fill out an IR3 annual tax return to return income and claim actual expenditure incurred.

In case your return hasn’t been completed before the due date for filing, the IRD will assume that you have picked the standard-cost method.

It is however recommended to keep and maintain your records, because it might be heard to ascertain until the end of the tax year whether you want to use the standard cost or actual cost method. You can jot down the number of weeks you had boarders, the total income generated from these boarders, cost of capital improvements or rent paid, kilometres you’ve travelled transporting them, and any other related expenses.

If you need assistance with selecting the right method to calculate the income made from boarders the applicable taxes on it, feel free to get in touch with us by mailing info@jzr.co.nz or call us on +64-9-972-2236.

Written by Rowain Pereira

Related Articles

New Changes To Tax-Loss Continuity Rules

There are some recent updates and changes which have been made to tax-loss continuity rules in light of the recent resurgence of Covid-19 in 2021. These changes are aimed at understanding the needs of businesses to raise additional capital to stay operational. The...

COVID-19 Support Payments 2021: All You Need To Know

We at JZR Accountants & Consultants hope everyone is keeping safe during this lockdown period. Things have certainly changed very fast as we go into alert level 3 again here in Auckland. To do our part for the community, we would like to let you know the latest...

Recent Tax Changes That May Impact You

The saying that “the only constant in life is change” is particularly due when it comes to tax. Tax legislation is constantly changing, and depending on your perspective, it could be either good or bad. But either way, it will impact on you as a business owner....

Stay Up to Date With The Latest News & Updates

Join Our Newsletter

Stay up to date with all of the latest news and insights related to your business. Sign up below and we promise to only send you content 

Are You a Landlord? Keep-up with the Changes

Are You a Landlord? Keep-up with the Changes

With one third of Kiwi’s renting their homes (some even for a lifetime), it’s important to have clear and fair rules for tenancies. This article will highlight some of the recent changes that have been made to rental property rules.

The government’s tenancy law reforms announced towards the end of 2019 are aimed at mainly protecting security and stability of tenancies for tenants. The Residential Tenancies Amendment Bill is making its way through Parliament and is currently with the Select Committee before moving on the to the next stage, the Second Reading.

If you’re a landlord:

  • Rent can only be increased once in twelve months, as opposed to six.
  • Tenants cannot be evicted without reason. Currently, periodic tenancy agreements can be terminated without reason, if you give your tenant 90 days’ notice. However, now you must select a reason from a list by the Residential Tenancies Act, stating a reason for the termination of the agreement.
  • Tenants will now be able to add minor fittings such as brackets to secure furniture against earthquakes, baby-proofing the property, installation of visual fire alarms or doorbells, or hang pictures.
  • Rental “bidding wars” will be banned.
  • The Tenancy Tribunal will be able to award compensation or order work to be done up to a value of $100,000 (instead of $50,000).
  • New tools will be available to help you take direct action against any tenants breaking the rules.

In context to damages, methamphetamine, and unlawful rental premises, the following changes will now be applicable:

  • If tenants (or their guests) damage your rental property as a result of careless behaviour, they will directly be liable. They can be charged up to a maximum of four weeks of rent or your insurance excess (whichever is lower).
  • If you have insurance, you must include this (and the excess) in any new tenancy agreement. A copy of the policy agreement should also be made available to the tenant on request.
  • You can also now test for methamphetamine while your tenants are living there. They must however be given at least 48 hours’ notice (but not more than 14 days’ notice). Boarding house tenants must be given at least 24 hours’ notice.
  • All legal requirements relating to the buildings, health, and safety apply to your rental property as well. It is the duty of the landlord to ensure that the property can legally be lived in at the start of the tenancy.

If you would like advice on how to manage the income being generated from your rental properties, or if you have any queries relatives to the new amendments being made to the Residential Tenancies Bill, please feel free to reach out to us on info@jzr.co.nz or call us on +64-9-972-2236.

Written by Rowain Pereira

Related Articles

New Changes To Tax-Loss Continuity Rules

There are some recent updates and changes which have been made to tax-loss continuity rules in light of the recent resurgence of Covid-19 in 2021. These changes are aimed at understanding the needs of businesses to raise additional capital to stay operational. The...

COVID-19 Support Payments 2021: All You Need To Know

We at JZR Accountants & Consultants hope everyone is keeping safe during this lockdown period. Things have certainly changed very fast as we go into alert level 3 again here in Auckland. To do our part for the community, we would like to let you know the latest...

Recent Tax Changes That May Impact You

The saying that “the only constant in life is change” is particularly due when it comes to tax. Tax legislation is constantly changing, and depending on your perspective, it could be either good or bad. But either way, it will impact on you as a business owner....

Stay Up to Date With The Latest News & Updates

Join Our Newsletter

Stay up to date with all of the latest news and insights related to your business. Sign up below and we promise to only send you content 

Tax Changes to Support Businesses: The Temporary Loss Carry-back Scheme

Tax Changes to Support Businesses: The Temporary Loss Carry-back Scheme

What is the scheme?

Businesses that are expecting to make a loss in 2019/20 or the 2020/21 financial year will be able to estimate the loss and use it offset profits in the past year. The scheme introduces the concept of offset years, which are the pair of years affected by the carry-back. The first year is named as the taxable income year and the second as the net loss year.

Simply put, this means that they can carry their losses back a year. This will allow the IRD to refund some or all of the tax paid for the year in which the business was in profit.

Taxpayers won’t have to rush to re-estimate their provisional tax before the 7th of May. The law change makes it possible for taxpayers to re-estimate it after the date of the final instalment. This gives them more time to work out any estimated losses for the income year 2020/21

All types of taxpayers – companies, trusts and even individuals will be able to carry-back losses. The majority of individuals who are taxed through the PAYE system do not have losses, so would be unaffected by this measure, but those what operate businesses through partnerships, limited partnerships, and look through companies would be able to benefit.

Standard late payment use of money interest would apply if the loss carry-back is overestimated. Ownership continuity, grouping, and imputation rules would also apply.

The proposed measure is intended to be temporary with the government planning to develop a permanent loss carry-back which will be applicable from FY22.

We’ve outlined the scheme through some examples below to further help you understand how it works. 

Example 1

ABC Architects is an architectural firm based in Christchurch. The business has been performing well in the last two years, but because most of its current projects are on-going (under construction), its work has dropped off due to restrictions being imposed on account of the COVID-19 pandemic. For the 2019/20 year the business is predicting its taxable income to be $5.6 million. However due to the losses that the business will incur on account of the restrictions being imposed and having no future projects in the pipeline, the business anticipates that for the 2020/21 year it will make a loss of $3.2 million.

ABC decides to carry back the anticipated loss to the 2019/20 year where the business paid a provisional tax of $1.2 million over the first two instalment dates for the 2019/20 income year and would be due to pay another $368,000 on May 7th, 2020. The firm re-estimates its provisional tax for the year, to take account for the carry-back loss which means its taxable income will be only $2.4 million ($5.6 million – $3.2 million), with the tax liability on that only being $672,000 ($2.4 million x 28%). The refund that ABC architects will receive is $528,000 ($1.2 million – $672,000) which will help provide it with funds to meet its ongoing costs.

Example 2

Jack & Austin own Model Figures Limited (MFL), a company that makes model spacecraft. They’ve had a good year up until 31st March 2020 overall, however performed really poorly in March since their customer base mainly comprises of overseas visitors. Given the current travel restrictions imposed on account of the COVID-19 pandemic, Jack and Austin do not see their businesses’ financial position recovering unless they get their online sales running or travel restrictions get lifted.

They estimate that in spite of cost cutting MFL will still make a probable loss to 31st March 2020 of at least $120,000. In the 2019/20 income year MFL used the standard method to pay provisional tax. Two instalments of $24,000 were paid on the 28th of August 2019, and the 15th of January, 2020. Jack and Austin have calculated that pre-COVID, MFL was estimated to make taxable income of $267,000, with tax payable on that amounting to $74,460, and hence they final instalment of provisional tax which amounted to $26,760 would be payable on the 7th of May, 2020.

The decide to carry-back the anticipated loss from the 2020/21 income year to the 2019/20 income year. This will give them a revised taxable income of $147,000 ($267,000 – $120,000) with a tax liability of $41,160. At the third instalment they decide to estimates MFL’s tax liability at $41,160 via myIR. This means that they would be no payment required for the third instalment, and Inland Revenue will refund MFL for an amount of $6,480 ($48,000 – $41,160).

However, by October 2020 Jack and Austin realise that the business is doing far worse than they anticipated and the expected loss is now calculated to be $170,000. While preparing MFL’s 2019/20 income tax return they reflect an increased loss in the return and hence receive an additional refund of $14,000 while filing.

When completing the 2020/21 tax return for MFL, Jack and Austin realise that the loss for the 2020/21 year will only be $110,000 given the quick recovery of the tourist industry in the first quarter of the 2021 calendar year. They complete the filing process for 2020/21, and amend the 2019/20 return for MFL. The reduce loss will now mean that the MFL has a taxable income of $157,000 ($267,000 – $110,000) and a tax liability of $43,960 in 2019/20. Since MFL has only paid a tax of $27,160, they will have a tax payable of $16,800 (which will be $5,600 at each instalment date). It will need to pay use-of-money interest on this amount over the three provisional tax instalment dates.

 

If you have any queries regarding the following, please feel free to get in touch with us on info@jzr.co.nz or call us on +64-9-972-2236.

Written by Rowain Pereira

Tax

Related Articles

New Changes To Tax-Loss Continuity Rules

There are some recent updates and changes which have been made to tax-loss continuity rules in light of the recent resurgence of Covid-19 in 2021. These changes are aimed at understanding the needs of businesses to raise additional capital to stay operational. The...

COVID-19 Support Payments 2021: All You Need To Know

We at JZR Accountants & Consultants hope everyone is keeping safe during this lockdown period. Things have certainly changed very fast as we go into alert level 3 again here in Auckland. To do our part for the community, we would like to let you know the latest...

Recent Tax Changes That May Impact You

The saying that “the only constant in life is change” is particularly due when it comes to tax. Tax legislation is constantly changing, and depending on your perspective, it could be either good or bad. But either way, it will impact on you as a business owner....

Stay Up to Date With The Latest News & Updates

Join Our Newsletter

Stay up to date with all of the latest news and insights related to your business. Sign up below and we promise to only send you content