Tax loss carry-back


2nd March, 2021

Just how useful is the NZ Temporary Tax Loss Carry-Back Scheme?

It has its detractors, but is the Government’s tax loss carry-back scheme helping struggling NZ business owners?

One of the responses to COVID-19 from the Government was a new temporary tax loss carry-back scheme.

Some cynical commentators felt that the tax part of the SME Relief Package (of which the loss carry-back scheme was part) was more about political spin than providing real help to small businesses, so just how useful is the loss carry-back?

The scheme enables businesses making a loss (whether actual or anticipated) in the 2020 and 2021 tax years to carry-back a tax loss to the prior tax year.

6 practical issues that arise from the tax loss carry-back scheme

1. Incurring a tax loss

It’s all very well being able to carry-back a tax loss, but many businesses, while suffering a large decline in profits, will not actually make a loss. Nor does it help other businesses yet to make a profit, such as startups, so the number of businesses which can benefit from the scheme is limited.

2. Tax paid

You can only get a tax refund if you have paid tax in the prior year and many small business entities have never paid tax, mainly because they breakeven after the withdrawal of profits to their owners.

3. Restrictions on tax refunds

There is a further trap, even if you have paid tax in the prior year, which is that the amount of any tax refund is limited to the amount standing to the credit of your imputation credit account. Many small businesses never actually accumulate much of a balance on their imputation credit account or have already utilised the imputation credits.

4. Provisional tax

The benefit of being able to anticipate a loss is that the provisional tax due based on prior year healthy profits can be estimated down to nil or reduced on the strength of the anticipated losses currently being incurred. This is all very well, but as soon as you estimate your provisional tax, you are subject to use of money interest for tax which you should have paid, had it not been for your pessimistic estimate.

The current IRD interest rate for tax paid late is still a usurious seven percent. While recent alleviating measures have lessened the impact of use of money interest, this is about as welcome as another lockdown.

5. A tax loss in the 2020 tax year?

The first lockdown occurred in the latter half of March 2020, so it’s surprising that the 2020 tax year was included in the scheme, because it would be a tall order to make such a huge loss in the last two weeks of the tax year to the extent that it engulfed the profit for the other 50 weeks of the year.

But, the scheme was very useful for a client of mine who had a bad year during 2019-2020, so he was ecstatic to get a tax refund of $8,000 which was totally unanticipated. In addition, the tax loss reduced their provisional tax for the 2021 tax year to nil for which they had already paid roughly $10,000, which was refunded as well.

All in all, this particular client did very well out of the scheme. Thing is, their loss was totally unconnected with the COVID-19 fallout.

6. Shareholder salaries

The great majority of businesses in New Zealand operate via a limited company and most remunerate their owners by means of a shareholder salary, which often equates to the amount of the available profits.

What this means is that the company breaks even and pays no tax, so the tax loss carry-back scheme is of no use.

What conclusions can we draw?

To be fair to the Government, the tax measures of the SME Relief Package were just a minor part, and looking at the New Zealand Government debt clock, it’s pretty frightening — so how much more relief can future generations afford?

All that aside, the tax loss carry-back scheme will benefit a number of businesses and we can only hope that a permanent tax loss carry-back scheme will be introduced.

Other tax jurisdictions enjoy much more generous permanent tax loss carry-back schemes with more flexibility on the tax years involved, so why not?

The information provided here is of a general nature and only applies in New Zealand. You should not act upon this information without obtaining appropriate professional advice and only after a thorough examination of your particular circumstances by an experienced professional.