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 7^th 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 7^th, 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 31^st 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 31^st 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 28^th of August 2019, and the 15^th 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 7^th 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.

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 31^st 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 31^st 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 31^st 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.