New Zealand: Proposed changes to tax loss rules, introduction of business continuity test

New Zealand: Proposed changes to tax loss rules

The Minister of Revenue announced details of further changes to the tax loss rules—revisions that would be intended to help businesses affected by the coronavirus (COVID-19) pandemic to maintain their tax losses if they breach the current 49% minimum shareholder continuity test (for example, with capital from new investors).


The new business continuity test would be added to the Taxation (Annual Rates for 2020-2021, Feasibility Expenditure, and Remedial Matters) Bill, by way of a Supplementary Order Paper (SOP). The bill is expected to be passed before 1 April 2021. 

  • The business continuity test would apply from the 2020-2021 income year. While this is aimed at COVID-19-driven shareholding changes, this would not be a requirement for the business continuity test to apply.
  • The business continuity test would be a hybrid of the Australian and UK “same or similar business” tests for carrying forward tax losses. It would allow companies to carry forward losses unless there is a major change in business activities.

To determine when there is a “major change”—

  • The new business continuity test would 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 would need to be compared. Whether a change is “major” would be a question of scale (having regard to the operation of the entire company).

There would be limited exceptions when a major change will not result in a breach of the business continuity test if changes are to:

  • Increase efficiency or scale
  • Keep pace with technological developments
  • 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 including:

  • Changes in the use of land (as a business asset) would not qualify as a major change exception.
  • Losses able to be carried forward under the business continuity test would be limited to those arising in the 2013-2014 income year onwards.
  • The business continuity test would 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 would be excluded from the business continuity test.
  • There would be Australian-style anti-income injection rules and rules to prevent losses being artificially transferred to associated companies.

The business continuity test would not apply for carrying forward imputation credits, and 66% shareholder commonality would remain for offsetting group losses (preventing offsetting of pre-acquisition losses). 

KPMG observation

During its COVID-19 response last year, the government indicated that it was looking at the broader tax loss rules. The result would be the business continuity test. The other measure—a permanent tax loss carryback regime—appears to have been discarded due to fiscal cost reasons.

Tax professionals view the business continuity test as a welcome change as is the willingness of government officials to work with the private sector to develop these rules. This means that New Zealand companies that need new investment capital—not just due to COVID-19-related economic disruption but also start-ups and others—would not forfeit their losses if their business has not undergone a major change. Importantly, the business continuity test sits alongside the existing test; thus, if shareholder continuity is maintained, losses can be carried forward even if there is a major change to the business.

The business continuity test 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). The business continuity test also borrows some features of the UK rules (the “major change” criterion) but with certain 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 business continuity test would apply for 2014 losses and later losses only) and avoidance (e.g., the business continuity test results would need to be tested at least five years and the exclusions from the business continuity test for dormant companies and from the major change exception for land).

Read a February 2021 report prepared by the KPMG member firm in New Zealand

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