In an address to the New Zealand International Fiscal Association conference, the Minister of Revenue announced details of further changes to the tax loss rules.
These are aimed at helping businesses impacted by COVID-19 to maintain their tax losses if they breach the current 49% minimum shareholder continuity test (for example, by getting capital from new investors).
The new business continuity test (BCT) will be added to the Taxation (Annual Rates for 202-21, Feasibility Expenditure, and Remedial Matters) Bill, by way of a Supplementary Order Paper (SOP). That Bill is expected to be passed before 1 April this year.
The BCT will apply from the 2020-21 income year. While this is aimed at COVID-19 driven shareholding changes, this is not a requirement for the BCT to apply.
The BCT is a hybrid of the Australian and UK ‘same or similar business’ tests for carrying forward tax losses. It will allow companies to carry forward losses unless there is a major change in business activities.
To determine where there is a ‘major change’:
— The new test will have regard to the assets used in the business and factors such as business processes, use of suppliers, markets supplied to, and the types of products or services supplied.
— The changed and unchanged business activities will need to be compared. Whether a change is major will be a question of scale (having regard to the operation of the entire company).
There will be limited exceptions where a major change will not result in a breach of the BCT if changes are to:
— Increase efficiency or scale;
— Keep pace with technological developments; or
— Rationalise a product or services range by introducing new items produced using largely the same assets (other than land) or related to products currently or previously produced.
A range of integrity measures are proposed:
— Changes in the use of land (as a business asset) will not qualify as a major change exception.
— Losses able to be carried forward under the BCT will be limited to those arising in the 2013-14 income year onwards.
— The BCT will need to be met for at least five years after a shareholding breach under the existing test (or, if the losses relate to bad debt deductions, until those losses are used).
— Dormant companies are excluded from the BCT.
— Australian style anti-income injection rules and rules to prevent losses being artificially transferred to associated companies.
The BCT will not apply for carrying forward imputation credits and 66% shareholder commonality remains for offsetting group losses (preventing offsetting of pre-acquisition losses).
During its COVID-19 response last year, the Government flagged that it was looking at the wider tax loss rules. The result is the BCT. (The other flagged measure, a permanent tax loss carry back regime, appears to have been discarded due to fiscal cost reasons. While understandable given the COVID-19 sized hole in the Government’s budget, it is disappointing as we believe this is good tax policy).
The BCT is a welcome change as was Officials willingness to work with the private sector to develop these rules. It will mean that New Zealand companies that need new investment capital – not just due to COVID-19 related economic disruption but also start-ups and others - will not forfeit their losses if their business has not undergone a major change. (Importantly, the BCT sits alongside the existing test meaning if shareholder continuity is maintained, losses can be carried forward even if there is a major change to the business).
The BCT is an improvement on the test in Australia (a “cut and paste” of the Australian rules was considered but rejected due to their restrictive nature). It borrows some features of the UK rules (the “major change” criterion) but also has bespoke elements (such as the ability to invest in innovation, which can result in a change in a business’s assets, without triggering a major change breach).
As expected, there are measures to limit both fiscal costs (the BCT applies for 2014 year and later losses only) and avoidance (e.g. the BCT test must be met for at least five years and the exclusions from the BCT for dormant companies and from the major change exception for land).
Some of the devil in the detail will only be known when the SOP on the Bill is tabled, so keep an eye out for it.