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

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Further Tax Changes to Help SMEs

Further Tax Changes to Help SMEs

There’s no doubt that the recent pandemic has had a huge impact on small and medium sized businesses in New Zealand. In addition to the tax changes that were previously announced, today the Government has introduced a few more tax measures that aim to help businesses through this rough period.

We have outlined below the three key tax changes that will be relevant to small and medium sized businesses.

 

Changes to Tax Loss Continuity Rules

Previously, any accumulated tax losses were forfeited if shareholder continuity of at least 49% was not maintained when there is a change in the shareholding of a company. This significantly impacted on the amount of tax losses available to be used by companies after trying to raise capital. Start-up companies with high growth and high capital raising requirements were particularly affected by this.

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.

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.

An example:

A start up firm XYZ, that offers microphone and webcam software has been incurring large losses in the recent years. However, it now intends on scaling up massively given that more people are working from home and using video conferencing.

Despite having a promising early-development software, banks are unwilling to lend to XYZ without it having a firm revenue base. After approaching several investors, another video conferencing company ABC has agreed to invest several millions into XYZ for a 75% stake in the business. While XYZ does want to accept the investment, the company is wary of losing the value of its losses, which would be extinguished under the current shareholder continuity test. The governments new ‘same or similar business’ test ensures that XYZ can take on new investors without losing it losses because its business will be of the same or similar nature as the business it was operating as while incurring those losses.

Given this, the price that XYZ will now stand to receive for the 75% equity stake will be higher as the ability to carry forward losses makes the business more valuable to its investors

 

A tax loss carry-back scheme

A tax loss carry back mechanism will enable a firm to offset a loss in a particular tax year against a profit in a previous year, and receive a refund for the tax paid in a previous profitable year. The proposed mechanism seeks to provide cash to firms that make a loss in the next income year.

A temporary mechanism will be included in a bill introduced in the week of the 27th of April. Between now and then Inland Revenue will be undertaking targeted consultation with tax advisors to make the law and administrative guidance as clear as possible.

An example:

Steven’s Hospitality Limited 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 $2 million 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).

Since the outbreak of COVID-19 the organisation has ceased operations, with no clear information on when they would be allowed to resume operations. The staff working for the organisation are still be paid (supported by the Wage Subsidy scheme). It seems that this year, the organisation will inevitably make a loss in the financial year ending 31st March, 2021. In early May, the directors meet with their chartered accountants in order to forecast certain scenarios. The scenarios anticipated in the forecast, indicate that the organisation will make a loss of $1.5 million for the year ended 31st March, 2021, although some scenarios indicate a greater loss of $2 million.

Anticipating that it will face ‘use-of-money-interest’ charges if the organisation over-estimates its loss, they decide to carry-back the more certain loss of $1.5 million to the 2019/2020 financial year, and re-estimate its income for that year to $500,000 (down from the $2 million). Since the Steven’s Hospitality Limited has already paid $310,000 in tax, it pays nothing on May 7th, and instead receives a refund of $170,000 for its earlier provisional tax payment.

Simply put, the Company returns $500,000 of income and pays $140,000 tax receiving back its earlier payments as refunds.

Allowing Inland Revenue to change due dates

The Government also proposes giving Inland Revenue discretion to temporarily change dates, timeframes and procedural requirements, such as tax return filing dates, and provisional and terminal tax dates. This provision will only apply to businesses and individuals affected by COVID-19.

The IRD will publish further guidance in the coming weeks after targeted consultation with tax advisors.

 

We hope this article has been helpful to you to understand the new proposed tax changes. If you have any queries regarding the above, or would like to find out how these tax changes will impact your business, you can reach out to us at info@jzr.co.nz or call us on 09-9722236.

 

Written by Rowain Pereira

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Upcoming Tax Changes In The Wake of COVID-19

Upcoming Tax Changes In The Wake of COVID-19

The Government has just announced a $12.1 billion dollar response package in the wake of the Coronovirus pandemic with the economic implications it’s slated to have. As part of this package, the government has also announced tax changes that are designed to help small businesses through this period.

We have provided a summary of the announced tax changes and what they might mean for you.

Reintroducing depreciation on commercial and industrial buildings

All depreciation deductions will be reintroduced for new and existing industrial and commercial buildings, including hotels and motels.

A Bill containing this measure will be introduced shortly. The law will allow owners of commercial and industrial buildings (including hotels and motels) to start reducing their provisional tax payments for the 2020-21 income year immediately. There is no application process as the increased deduction will be available as part of normal tax filing processes.

For example, John owns a motel with a tax book value which is lesser than $3 million. Under the existing law, it is not depreciated.  However, from 2020/21 John will be able to depreciate the current value of his building at the rate of 2%. This essentially means that John’s company can claim a deduction of $60,000 in the 2021/22 year reducing his taxable profit. The final result means John’s company will end up paying $16,800 lesser in taxes as the company tax rate is at 28%.

 

Immediate Deductions for low value assets

Taxpayers 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 taxpayers to bring forward investments to encourage spending. The threshold is being permanently increased to $1,000 (from 2021/22).

For example, Capes Comics Limited is a comic book store that sells comics and other merchandise, and is looking to expand by investing in a new display cabinets worth $4,600 which the owner believes will help in increasing sales of high-value action figures that will be put up on display.

With the Covid-19 restrictions, the owner gets anxious about investing the sum, considering the fact that he can only deduct the cost of the cabinets though tax depreciation over time, and not immediately.

With the new regulations issued by the parliament, this means that Capes can claim an immediate deduction for the cost of the cabinets, which means they can reduce the tax being paid on the cabinet in this year by $1,288, instead of having that amount spread out over the years.

 

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 example, Jenny is a tour guide who provides tours around Wellington through her touring company Jenny Tours & Travels Limited. She gets a majority of her customers from cruise ships visiting Wellington. For 2019/20 Jenny Tours & Travels tax liability was $8,000 but because of the recent outbreak of Covid-19 it’s 2020/21 tax liability is expected to be half the amount.

The increase in the threshold for provisional tax essentially means that Jenny Tour & Travels will not be a provisional tax payer for 2020/21 income year, so instead of paying tax throughout the year, the company will not have to pay the tax until the 7th of April in 2022 (assuming she has a tax agent to help her), improving the company’s cashflow during the year.

 

Writing off interest on some late payment tax

The commissioner of Inland Revenue will be given the power to waive interest on late tax payments for taxpayers 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 example, Jessica owns a tiny restaurant. Due to the outbreak, the last few weeks has seen a sharp decline in the number of customers who visit the restaurant. Due to the decline in her number of customers, Jessica’s turnover is about half of what it was a year ago, which means she won’t be able to pay her tax bill in full. She’s tried to get an extension to the business overdraft from the bank, but unsuccessfully.

Keeping these circumstances in mind, the IRD has a range of options to help customers who are struggling to meet tax payments. After evaluating these options, Jessica is able to enter into an instalment agreement to pay off her tax bill over a six-month period. This new measure will allow Inland Revenue to write off any use of money interest on this debt.

 

If you’re a small business owner and are facing hardship because of the Covid-19 outbreak, please feel free to get in touch with us at 09-972-2236 or info@jzr.co.nz. We would love to help.

Written by Rowain Pereira

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Your Checklist to Keep Tax Time Low Stress

Your Checklist to Keep Tax Time Low Stress

The tax season is just around the corner and we all know how gruelling it can be sometimes. With a lot of businesses running around till the last minute to get their paperwork in place, this period can get extremely stressful. Keeping that in mind here are few things you need to do to help you keep this period stress free.

First things First

Make sure you’re constantly in touch with your accountant. They’ll keep you updated on the proceedings and what needs to be done before the 31st of March, including what you can claim and what you can’t. This is an eventful period, and your accountants will be busy themselves, so the better prepared you are, the smoother the process and result will be.

Don’t spend your hard-earned cash on unnecessary interest and penalties. Make sure your accounts are up to date, tidy up loose ends and ensure you file your return on time.

 

Your assets and stock

Review your inventory. The value of your stock affects your business’s taxable profits. Conduct a thorough stocktake before the year-end and ensure you get rid of any out-to-date or damaged items, and write them off.

This is the right time to for you to ditch surplus assets. If it’s possible to sell these assets, great, otherwise simply ensure that you’ve written them off.

 

Your Spending

If you’re planning to buy any new equipment or assets, make sure you do it on or before the 31st of March. Making these purchases in the current financial year will help in reducing your taxable income and help you gain a full month’s depreciation.

It can also be cumbersome to keep track of all your expenses, so if you haven’t already gone digital, now would be the right time to do so. Scanning receipts and saving electronic invoices in your cloud saves time and space. Not to forget all the papers, and trees you’d be saving too.

 

Your Staff

The last step on the list is your staff. Check your payroll system and ensure it only includes current employees. Review their details further and ensure that everything which is logged in, is correct and up-to-date. Also do not forget to ensure that any former staff has access to company systems. If you find any discrepancies, make sure you correct them immediately.

Be in constant touch with all your employees. Special bonuses at this time of the year can be a great motivational tool for your employees. However, make sure to get the tax right on any lump sums being made. Remember that any bonuses for the current year, and holiday pay or long service leave paid out within 63 days after March 31st can be deducted against your current year income.

 

We hope these tips can help in making your life a little stress free, especially during this period. In case you have any other concerns or queries regarding your filings for this financial year, get in touch with us immediately, by either mailing us on info@jzr.co.nz or calling on +64-9-972-2236.

Written by Rowain Pereira

Tax

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The New Kilometre Rate for Claiming Motor Vehicle Expenses

The New Kilometre Rate for Claiming Motor Vehicle Expenses

Are you an employee who frequently uses his/ her car for business expenses? We’re going to be outlining the process for claiming tax on your work vehicle expenses.

Here are some important points which you need to consider:

  1. If you’re using a vehicle for business purposes, you can claim tax back on expenses incurred.
  1. If the vehicle is solely being used for business purposes, the entire running cost can be claimed. However, if the vehicle is being used for personal travel as well as business purposes, the running costs of the vehicle will have to be split between business and private use.
  1. There are two ways by which you can calculate the business usage of the vehicle:
  • Actual costs which requires you to keep accurate records, which include the details of personal and work-related expenses. The reasons for business travel and distances involved will also have to be provided while filing your claim.
  • A logbook can be maintained to record all business trips, based on which an actual percentage of business use can be calculated. Alternatively, you can also keep a logbook for at least 90 consecutive days, to work out the business use of your vehicle which can then be used for the next 3 years (as long as the nature of the business varies by less than 20% over that period of time).
  1. Once you’ve ascertained what the percentage for the business use of your vehicle is, you can use the IRD’s kilometre rate (shown in the table below) to work out the amount which can be claimed. There are 2 rates defined by the IRD, which are:
  • Tier One Rate: Tier One is calculated by combining the vehicles fixed and running costs. This tier applies for the business portion of the first 14,000 kms travelled by a vehicle in a year.
  • Tier Two Rate: Tier Two accounts for just the running costs of the vehicle and can only be applied for the business portion of the any travel in excess of 14,000 kms.

Kilometre Rates (from 2019 onwards)

Vehicle type

Tier One rate:

First 14,000 kms

Tier Two rate:

After 14,000 kms

Petrol or Diesel

79 cents/km

30 cents/km

Petrol Hybrid

19 cents/km

Electric

9 cents/km

 

To make the process of claiming your business usage of the vehicle easier, make sure you record odometer readings at the end of every year to help you determine your business mileage vs personal mileage.

If you’re a business which provides its staff with vehicles (including yourself), it is prudent to ensure you’ve got your fringe benefit tax position right.

You can get in touch with us to know what exemptions may apply for specific types of vehicles, or in instances where restrictions are placed on the use of company owned vehicles. Mail us your queries on info@jzr.co.nz, or simply call +64-9-972-2236

 

Written by Rowain Pereira

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Are You a New Zealand Tax Resident? Why Is It Important To Know

Are You a New Zealand Tax Resident? Why Is It Important To Know

Why is it important?

Like most other countries, one of the ways that New Zealand imposes tax is by the concept Tax Residency. It means that all New Zealand tax residents are liable to pay tax to the Inland Revenue Department (IRD) on their worldwide income.

Your worldwide income includes any income that you derive in a foreign country even if you do not bring the money into New Zealand.

This is very important because it will drastically change the amount of tax you will have to pay to the IRD. This will be particularly relevant if you have significant assets overseas, or if you’re a new migrant to New Zealand, who still have financial ties to your country of origin.

Your worldwide income could include the following:

  • An amount of interest you derive from funds you have in an offshore bank account
  • Rental income (a rental property in Australia? Or China?)
  • Salary and wages paid both by New Zealand companies and offshore companies

Common Misconception

A common misconception that people have is that they confuse the definition of “resident” for immigration purposes with “tax resident” for tax purposes. The definition of a New Zealand resident for immigration purposes is different to the definition of “tax resident”, which is defined in the Income Tax Act 2007. What this means is that whilst you may be on a student or work visa in New Zealand, you might still nonetheless be considered a tax resident of New Zealand. Conversely, you might hold a permanent resident visa but, in some circumstances, still not be a tax resident of New Zealand.

Therefore, this leads us to the next question.

What is the definition of a “tax resident”?

If you want to find out if you are a New Zealand tax resident or not, then you have to look at the definition in sYA1 of the Income Tax Act 2007. Essentially, if you meet either one of points below, then you will be a tax resident of New Zealand.

  1. Be physically present in New Zealand for 183 days in any 12 month period; OR
  1. Have a Permanent Place of Abode (PPOA) in New Zealand

Things to watch out for

Note how the first point mentions that the 183 days is counted in any 12 month period. So it’s not 183 days in a calendar year or tax year. This is an important distinction because you could have triggered this inadvertently if you’re not careful.

The term “Permanent Place of Abode” in layman’s terms is a lasting or enduring place where the taxpayer usually live. A person could have more than one permanent place of abode in different countries. So say if you split your time between New Zealand and Australia, and have a regular place to live in each country, then it could be very possible that you have a permanent place of abode in both New Zealand and Australia.

Common Issues

Properties Owned Overseas

Being a New Zealand tax resident not only means that you will need to pay tax on your overseas income, but it also means that New Zealand tax law apply to your overseas assets as well.

Many of you might have heard of the bright-line test for residential properties, where if you buy and sell within 5 years, then you will need to pay tax on the capital. However, not many people know that if you’re a New Zealand tax resident, then this rule applies to your properties owned overseas as well. So if you bought and sold a residential property in Australia for example, within 5 years after 29 March 2018, then you will need to report that gain to the IRD and pay tax on it.

Rental or Business Income from overseas

Another common issue that we see is clients having rental properties or business income from overseas. In that situation, taxes might have already been paid in that foreign country, and in order to avoid double taxation, we can help you determine if a foreign tax credit might be available and then to accurately ascertain that tax credit amount to reduce your tax payable.

Own shares in a foreign company?

Another common issue that some clients face is if they also own shares in an overseas company. In particular, if they own shares in an overseas privately held company. There are separate rules dealing with such cases which can be very complex and you might need to pay tax on paper gains which you have not received a cash receipt for. So be very careful in that case, and contact us to make sure all the right disclosures are made to the IRD, and that you’re not paying more tax than you should.

Transitional Resident

There is another rule called the “transitional resident” rule, which exempts overseas income from taxation within 4 years of a person first becoming a New Zealand tax resident. There are some strict rules around who can qualify for this, and when the 4 years start and when it ends. There are also some exceptions to this transitional resident rule. So please make sure to contact us if you’re in this situation and we can help you determine which rules apply to you. This could potentially mean thousands if not tens or hundreds of thousands of dollars. So getting the right advice is crucial.

We hope this answers all your queries. Watch this space and stay tuned, because we will be back to talk about what happens when you’re a tax resident in New Zealand as well as another country.

Written by Gordon Tian

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