On Tuesday evening, the government announced a number of significant tax changes that will be very valuable to some businesses.

The most significant change

The most significant change is that taxpayers with tax losses in 2020 or who expect losses in 2021 will be able to use those losses against profits in the prior year, which will result in tax refunds for that prior year. In other words, they will be able to be turned into cash benefits now, rather than carrying the loss forward and saving tax in the future.

The details around this are very loose at the moment and will be for the next week or so. However, an example of how this is expected to work:

Example:

X Ltd had $2m profit in 2020 and has already paid $310k prov tax in respect of that. They will be paying a further $250k on 7 May.

They already expect a $1.5m loss for 2021, in part due to COVID closure.

The opportunity: X Ltd can estimate/re-estimate 2020 prov tax to $500k (i.e. the original $2m profit minus the $1.5m loss carried back) x 28% = $140k, and get a refund of the $170k excess tax they have already paid (and obviously not pay anything on May 7).

The benefit: X Ltd in the next few weeks has an extra $420k cash, rather than a balance of tax losses that it can’t turn into cash potentially for at least a year (and in some cases this could be longer).

This is also proposed to apply to 2020 losses – i.e. they can carry back and use against profits from 2019.

We will have more details on this next week – we will update you then.

What you should do now

1. If you had a loss in the 2019 tax year and tax profits in the 2018 tax year, we will in most cases be able to determine that from our records and we will contact you to discuss your situation.

2. If you expect that you had or will have a loss for the 2020 year and you had taxable profits in the 2019 year please contact us so that we can help you determine how best to use those losses to get extra cash for you and your business, as quickly as possible.

Other tax changes to be aware of

• It will be easier for the IRD to extend filing deadlines for taxpayers affected by COVID 19, so that late filing doesn’t necessarily get penalised;
• There will be greater ability for companies to carry losses forward from one tax year to another in the future as there is proposed to be a ‘same business’ test introduced that a company can satisfy instead of having to satisfy the ‘shareholder continuity’ test. We expect this will be of assistance in many cases of relatively new businesses which are looking to expand their equity base, but also possibly in situations where some restructuring of existing groups is planned but can’t be undertaken under the current rules due to the risk of losing tax losses

We will keep you updated on all of the tax changes outlined above as more information is released in the coming days and weeks.

In the meantime, we have heard that some people and businesses are not getting the support they need from their business advisers. Therefore, if you are aware of any friends, family, business connection etc. who would appreciate more in the way of specialist tax, business advisory or accounting assistance please encourage them to contact us and we will do our best to help them.

Disclaimer – While all care has been taken, Johnston Associates Chartered Accountants Ltd and its staff accept no liability for the content of this newsletter; always see your professional advisor before taking any action that you are unsure about.