The latest update regarding support for businesses impacted by COVID-19
April 17, 2020
Earlier this week the Government announced two changes to tax law for companies, announced they are changing legislation to provide greater flexibility to Inland Revenue for deadlines, announced an extension in timing before commercial landlords can act against tenants and a scheme to provide for business consultancy support. These five items are discussed below.
Two changes to tax law for companies
In summary, unless you are operating an ordinary company (not a look through company or a company that attributes its income to you) the tax law changes will not apply to you. Further if your company has been profitable, even a small profit, the changes will also not be of current benefit. However, the Government has signalled that these changes will be permanent, so there may be benefit in the future.
The first change is the ability to carry back a tax loss to the previous year. At present if your company has made a loss, that loss is only available to be used to offset profits in subsequent years. The loss applies to reduce future taxable profits and therefore the future tax liability. The change will allow the current year loss to apply to the previous year’s profit and create the ability to obtain as a refund the tax paid in that year reduced by the loss applied.
As an example, your company for the year ended 31 March 2019 made a profit of $10,000 and therefore paid tax of $2,800. For the year ended 31 March 2020, because of the effects of COVID-19, the company is going to make a loss of $30,000. The change allows you to carry back $10,000 of that loss to the 2019 year and makes available the $2,800 paid as a refund. The remaining loss of $20,000 is carried forward to future years.
There is also the scope to estimate your result for the 2020/2021 year, the year beginning 1 April 2020. If you are estimating there will be a loss for this current year, you can apply that loss to offset a profit you may have made this past year ended 31 March 2020, which except for the last few weeks was unaffected by COVID-19. This can be used to reduce or eliminate your 7 May provisional tax instalment. Caution is advised in estimating a loss at this early date, as interest and penalties can be applied if you over-estimate your loss. How this is to be done to communicate with IRD has yet to be advised.
Under the design of the loss carryback, you can only go back one year, and it commences from the current year ending 31 March 2020. You can see that if you’ve been profitable all along (or loss making) this change does not provide benefit. This change is subject to legislative refinements (such as requiring sufficient imputation credits to support a refund payback) with the legislation to be introduced to Parliament on 27 April.
If you’re wondering whether you can attain a benefit for your company, as each situation will be different, contact us and we can review your situation with you. We’ll also be making suggestions to apply the carryback as we complete your annual accounts.
The second change is a relaxation in the requirement to maintain consistent shareholding to preserve losses brought forward. At present if your company has had losses you need to maintain your share ownership with at least 49% of the same shareholders throughout each period or the losses you’ve been carrying forward are sacrificed and forfeited.
Under the change announced, the measure to preserve losses changes to a test of maintaining a “same or similar” business test (similar to Australia) that will allow tax losses to be carried forward despite a major change in the shareholding of the company. This is designed for providing a developing business to obtain a capital injection to fund its development without sacrificing existing losses. It’s expected to apply mainly to start-up businesses such as software development firms, but could apply to any business currently making losses.
The details of the changes will be included in a tax bill introduced in the second half of 2020. The new rules will apply for 2020/21 and later income years and will be modelled on Australia’s rules.
If your company has losses and you’re looking for an investor to acquire a significant shareholding in your company by buying into it, this change will benefit your company.
Greater flexibility for taxpayers in respect of statutory tax deadlines
The third change introduced will give Inland Revenue greater discretionary power for all taxpayers to provide an extension to due dates and timeframes, or to modify procedural requirements set out in the Revenue Acts. This could include, for example, extending deadlines for filing tax returns and paying provisional and terminal tax. At this stage, the power will be limited for a period of 18 months and will apply to businesses affected by COVID-19. The increase in flexibility for deadlines is expected to be included in the tax bill to be introduced at the end of April.
Examples of how this flexibility will be applied have yet to be given and it is not clear what this will provide. It is certain, however, that the taxpayer must have been affected by impacts of COVID-19, yet how this is established is yet to be indicated. As more details or examples are provided we will let you know. IRD’s discretion to remit penalties and interest for late payments caused by effects of COVID-19, announced earlier, remain.
Extensions of notice periods for Commercial Landlords to cancel a lease
The fourth announcement is the Government is extending the current timeframe that commercial landlords can cancel a lease from 10 to 30 working days. This is for both (i) the period the tenant is in arrears before the notice is given, and (ii) the period required to remedy the breach before the landlord can cancel the lease and the mortgagee can exercise their rights to sale or repossession. The changes allow for more time for breaches or defaults to be remedied.
While this doesn’t address the hole in Government support or regulations for commercial landlords to support tenants affected by COVID-19 it does indicate some awareness of the issue. We are aware that the Government is receiving submissions from different groups on the scale of their concerns, such as Hospitality New Zealand, though the organisation claims their submissions “had fallen on deaf ears”.
The Government is also extending the timeframes for lenders from 20 to 40 working days for mortgaged land and from 10 to 20 working days for mortgaged goods. This will apply to commercial mortgages and home loans.
Legislation on these changes will be introduced on 27 April and will apply retrospectively once the bill is passed.
Business consultancy support
The fifth item announced will provide businesses with access to free, specialist support for a range of issues they may be currently facing. As you’re reading this item from us, it is still unclear how the support will be accessed and we are obviously investigating. We do know that existing helplines often used by businesses, such as those operated by the Employers and Manufacturers Association and the Canterbury Chamber of Employment and Commerce, will also be extended. If you are feeling that you’re missing support on financial, capital, cash flow, or other issues, we’re sorry and in the first instance please contact us so we can see what can be done, or work to find a place to direct you. We’re hoping to access these funds to subsidise additional support.
These announcements are not the immediate ones provided earlier (and retained). Of those announcements you should have received your wages subsidy by now or if you’re still considering applying, let us know. Or if you’re considering accessing the guarantee of the Business Finance Guarantee Scheme, we can assist with your application.
Finally, IRD has implemented its changes to myIR and has resumed its services from 6:00pm Thursday 17 April. This means, for instance, Payday filing schedules resume, though we have observed issues with connectivity with certain payroll software that is being addressed.
Feel free to contact us to discuss your situation and how all these effects may affect you.
Contact us today for your no-obligation consultation.