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.
To determine when there is a “major change”—
There would be limited exceptions when a major change will not result in a breach of the business continuity test if changes are to:
A range of integrity measures are proposed including:
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).
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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